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Review: Chapters 13, 14, 15, attached, as well as the

16 Financial Ratios for Analyzing a Company’s Strengths and Weaknesses (Links to an external site.)

article and the

Financial Ratios (Links to an external site.)

web page. You will also utilize Appendices 13A, 13B, 13C, and 33A attached as well as the B

alance Sheet and Income Statement

from Dr. Smith and Dr. Brown’s Financial Statements.

Write Part 1: Open the Financial and Operating Ratios Assignment template attachment. You will be responsible for entering your responses directly into the template provided. You will need to ensure that your responses are thorough, examples are given where indicated, and references are listed in APA format in the space provided within the template. In the assignment template provided, directions to complete Parts 1 through 5 is below:

Part 1: Calculations of Financial Ratios

· Calculate the financial ratios for Dr. Smith and Brown’s physician practice to analyze the financial viability of the organization.

· Identify the type of ratio for each of the following:

o Current ratio

o Quick ratio

o Debt Service Coverage ratio (DSCR)

o Operating Margin

o Return on Total Assets (ROTA)

Part 2: Type of Ratios

· Define the type of ratios used in determining the financial viability of an organization.

o Liquidity

o Solvency

o Profitability

Part 3: Operating Ratios

· Define the financial ratios utilized to determine the financial status of Dr. Smith and Brown’s physician practice.

· Compare the results in Part 1 with the median to determine the value associated with the financial ratio.

· Analyze the results calculated in Part 1 and explain what the calculated result tells you about the financial health of Dr. Smith and Dr. Brown’s physician practice

Part 4: Capital Budgeting Expenditures – Time Value of Money Calculations

· Calculate each of the operational ratios for Dr. Smith and Dr. Brown’s physician practice.

o Present Value

o Internal Rate of Return

o Pay Back Period

Part 5: Evaluation of Capital Expenditures

· Define the time value of money

· Provide a real-world example for the time value of money

· Explain why time is an important factor when considering a capital expenditure.

Write Part 2: After review of the

Dr. Smith and Dr. Brown’s financial statements

and ratios, analyze the feasibility that the Capital Expenditure listed above would benefit Dr. Smith and Dr. Brown’s practice.

1. Explain your rationale on whether you would recommend the purchase of the capital expenditures identified.

2.Include any positive or negative aspects of regulatory or government mandates that were considered in making the decision to purchase the capital expenditures.

Due 1.10.20 @ 9am eastern time w /plag report. Use the attachments and use your own words!

$500 invested at the beginning of year 1

.05 earns interest (assumed) at a rate of 5% for one year,

$525 and we have a compound amount at the end of year 1 amounting to $525,

.05 which earns interest (assumed) at the rate of 5% for another year,

$551 and we have a compound amount at the end of year 2 amounting to $551 (rounded), and
so on.

13.3 PRESENT-VALUE ANALYSIS
The concept of present-value analysis
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch13_sect1_8#ch13_key3) is
based on the time value of money
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch13_sect1_8#ch13_key4) .
Inherent in this concept is the fact that the value of a dollar today is more than the value of a
dollar in the future: thus the “present value” terminology. Furthermore, the further in the
future the receipt of your dollar occurs, the less it is worth. Think of a dollar bill dwindling
in size more and more as its receipt stretches further and further into the future. This is the
concept of present-value analysis.

We learned about compound interest in math class. We learned that

Using this concept, it is possible to restate the present values of $1 to be paid out or received
at the end of each of these years. It is possible to use equations, but that is not necessary
because we have present-value tables (also called “look-up tables,” because one can “look-
up” the answer). A present-value table is included at the end of this chapter in Appendix 13-
A (http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch13_app1#ch13_app1) . All
of the figures on the present-value table represent the value of a dollar. The interest rate
available on this version of the table is on the horizontal columns and ranges from 1% to
20%. The number of years in the period is on the vertical; in this version of the table, the
number of years ranges from 1 to 30. To look up a present value, find the column for the
proper interest. Then find the line for the proper number of years. Then trace down the

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interest column and across the number-of-years line item. The point where the two lines
meet is the number (or factor) that represents the value of $1 according to your assumptions.
For example, find the year 10 by reading down the left-hand column labeled “Year.” Then
read across that line until you find the column labeled “10%.” The point where the two lines
meet is found to be 0.3855. The present value of $1 under these assumptions (10 year/10%)
is about 38.5 cents (shown as 0.3855 on the table).

Besides using the look-up table, you can also compute this factor on a business analyst
calculator. A reference to business analyst calculators is contained in the Appendix entitled
“Web-Based and Software Learning Tools.” This can be found at the end of this text.
Besides using either the look-up table or the business calculator, you can use a function on
your computer spreadsheet to produce the factor. The important point is this: no matter
which method you use, you should get the same answer.

Now that you have the present value of $1, by whichever method, it is simple to find the
present value of any other number. You merely multiply the other number by the factor you
found on the table—or in the calculator or the computer. Say, for example, you want to find
the present value of $8,000 under the assumption used above (10 years/10%). You simply
multiply $8,000 by the factor of 0.3855 you found in the table. The present value of $8,000
is $3,084 (or $8,000 times 0.3855).

A compound interest table is also included at the end of this chapter in Appendix 13-B
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch13_app2#ch13_app2) , along
with a table showing the present value of an annuity of $1.00 in Appendix 13-C
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch13_app3#ch13_app3) , so that
you have the tools for computation at your disposal.

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13.7 RESOURCES
Three look-up tables are presented as appendices to this chapter. They include the following:

■ Present-Value Table (the present value of $1.00)

■ Compound Interest Table (the future value of $1.00)

■ Present Value of an Annuity of $1.00

These tables provide an ongoing resource for you.

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13.6 EVALUATIONS
Evaluating the use of resources in healthcare organizations is an important task. There are
never enough resources to go around, and it is important to use an objective process to
evaluate which investments will be made by the organization. A uniform use of a chosen
method of evaluating return on investment and/or payback period makes the evaluation
process more manageable.

It is important to choose a method that is understood by the managers who will be using it. It
is equally important to choose a method that can be readily calculated. If a multiple-page
worksheet has to be constructed to set up the assumptions for a modestly priced piece of
equipment, the evaluation method is probably too complex. This comment actually touches
on the cost-benefit of performing the evaluation.

Sometimes a computer program is chosen that performs a uniform computation of
investment returns and payback periods. Such a program is a suitable choice if the managers
who use it understand the printouts it produces. Understanding both input and output is key
for the managers. In summary, evaluations should be objective, the process should not be too
cumbersome, and the responsible managers should understand how the computation was
achieved.

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$500 invested at the beginning of year 1

.05 earns interest (assumed) at a rate of 5% for one year,

$525 and we have a compound amount at the end of year 1 amounting to $525,

.05 which earns interest (assumed) at the rate of 5% for another year,

$551 and we have a compound amount at the end of year 2 amounting to $551 (rounded), and
so on.

We learned about compound interest in math class. We learned that

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13.4 INTERNAL RATE OF RETURN
The internal rate of return
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch13_sect1_8#ch13_key1) (IRR)
is another return on investment method. It uses a discounted cash flow technique. The
internal rate of return is the rate of interest that discounts future net inflows (from the
proposed investment) down to the amount invested. The return for a particular investment
can therefore be known. The IRR recognizes the elements contained in the previous two
methods discussed, but it goes further. It also recognizes the time pattern in which the
earnings occur. This means more precision in the computation because IRR calculates from
period to period, whereas the other two methods rely on an average investment.

The IRR computation is not very complicated. The computation requires two assumptions
and three steps to compute. Assumption 1: Find the initial cost of the investment.
Assumption 2: Find the estimated annual net cash inflow the investment will generate.
Assumption 3: Find the useful life of the asset (generally expressed in number of years,
known as periods for this computation). Step 1: Divide the initial cost of the investment
(Assumption 1) by the estimated annual net cash inflow it will generate (Assumption 2). The
answer is a ratio. Step 2: Now use the look-up table. Find the number of periods
(Assumption 3). Step 3: Look across the line for the number of periods and find the column
that approximates the ratio computed in Step 1. That column contains the interest rate
representing the rate of return.

How is IRR used? It can take the rate of return obtained and restate it. The restated figure
represents the maximum rate of interest that can be paid for capital over the entire span of
the investment without incurring a loss. (You can think of that restated figure as a kind of
break-even point for investment purposes.) The fact that a rate of return can be computed is
the benefit of using an IRR method.

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Same Year for All Three Hospitals

Hospital 1 Hospital 2 Hospital 3

Current liabilities $100,000 20% $500,000 25% $400,000 80%

Long-term debt 400,000 80% 1,500,000 75% 100,000 20%

Total liabilities $500,000 100% $2,000,000 100% $500,000 100%

14.1 COMMON SIZING
The process of common sizing puts information on the same relative basis. Generally,
common sizing involves converting dollar amounts to percentages. If, for example, total
revenue of $200,000 equals 100%, then radiology revenue of $20,000 will equal 10% of that
total. Converting dollars to percentages allows comparative analysis. In other words,
comparing the percentages allows a common basis of comparison. Common sizing is
sometimes called “vertical analysis” (because the computation of the percentages is
vertical).

Although such comparisons on the basis of percentages can, and should, be performed on
your own organization’s data, comparisons can also be made between or among various
organizations. For example, Table 14–1
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch14_sect1_1#ch14_tbl1) shows
how common sizing allows a comparison of liabilities for three different hospitals. In each
case, the total liabilities equal 100%. Then the current liabilities of hospital 1, for example,
are divided by total liabilities to find the proportionate percentage attributable to that line
item (100,000 divided by 500,000 equals 20%; 400,000 divided by 500,000 equals 80%).
When all the percentages have been computed, add them to make sure they add to 100%. If
you use a computer, computation of these percentages is available as a spreadsheet function.

Table 14–1 Common Sizing Liability Information

Another example of comparative analysis is contained in Table 14-2

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Same Year for All Three Hospitals
Hospital 1 Hospital 2 Hospital 3

General services expense

Dietary $320,000 40% $1,260,000 42% $450,000 50%

Maintenance 280,000 35% 990,000 33% 135,000 15%

Laundry 80,000 10% 300,000 10% 90,000 10%

Housekeeping 120,000 15% 450,000 15% 225,000 25%

Total GS expense $800,000 100% $3,000,000 100% $900,000 100%

(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch14_sect1_1#ch14_tbl2) . In this
case, general services expenses for three hospitals are compared. Once again, the total
expense for each hospital becomes 100%, and the relative percentage for each of the four
line items is computed ($320,000 divided by $800,000 equals 40% and so on). The
advantage of comparative analysis is illustrated by the “laundry” line item, where the dollar
amounts are $80,000, $300,000, and $90,000 respectively. Yet each of these amounts is 10%
of the total expense for the particular hospital.

Table 14–2 Common Sizing Expense Information

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Hospital 1

Year 1 Year 2 Difference

Current liabilities $100,000 20% $150,000 25% $50,000 50%

Long-term debt 400,000 80% 450,000 75% 50,000 12.5%

Total liabilities $500,000 100% $600,000 100% $100,000 –

14.2 TREND ANALYSIS
The process of trend analysis compares figures over several time periods. Once again, dollar
amounts are converted to percentages to obtain a relative basis for purposes of comparison,
but now the comparison is across time. If, for example, radiology revenue was $20,000 this
period but was only $15,000 for the previous period, the difference between the two is
$5,000. The difference of $5,000 equates to a 33.3% difference because trend analysis is
computed on the earlier of the two years: that is, the base year (thus, 5,000 divided by
15,000 equals 33.3%). Trend analysis is sometimes called “horizontal analysis” (because the
computation of the percentage of difference is horizontal).

An example of horizontal analysis is contained in Table 14–3
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch14_sect1_2#ch14_tbl3) . In this
case, the liabilities of hospital 1 for year 1 are compared with the liabilities of hospital 1’s
year 2. Current liabilities, for example, were $100,000 in year 1 and are $150,000 in year 2,
a difference of $50,000. To arrive at a percentage of difference for comparative purposes, the
$50,000 difference is divided by the year 1 base figure of $100,000 to compute the relative
differential (thus, 50,000 divided by 100,000 is 50%).

Table 14–3 Trend Analysis for Liabilities

Another example of comparative analysis is contained in Table 14–4
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch14_sect1_2#ch14_tbl4) . In this
case, general services expenses for two years in hospital 1 are compared. The difference

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Hospital 1
Year 1 Year 2 Difference

General services expense

Dietary $320,000 40% $405,000 45% $85,000 26.5%

Maintenance 280,000 35% 270,000 30% (10,000) (3.5)%

Laundry 80,000 10% 45,000 5% (35,000) (43.5)%

Housekeeping 120,000 15% 180,000 20% 60,000 50.0%

Total GS expense $800,000 100% $900,000 100% $100,000 –

between year 1 and year 2 for each line item is computed in dollars; then the dollar
difference figure is divided by the year 1 base figure to obtain a percentage difference for
purposes of comparison. Thus, housekeeping expense in year 1 was $120,000, and in year 2
was $180,000, resulting in a difference of $60,000. The difference amounts to 50% ($60,000
difference divided by $120,000 year 1 equals 50%). In Table 14–4
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch14_sect1_2#ch14_tbl4) , two of
the four line items have negative differences: that is, year 2 was less than year 1, resulting in
a negative figure. Also, the dollar figure difference is $100,000 when added down (subtract
the negative figures from the positive figures; thus, $85,000 plus $60,000 minus $10,000
minus $35,000 equals $100,000). The dollar figure difference is also $100,000 when added
across ($900,000 minus $800,000 equals $100,000).

Table 14–4 Trend Analysis for Expenses

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Comparative Expenses

Account 12-Month
Current
Year

% 12-Month
Prior Year

% Annual
Increase
(Decrease)

% of
Change

Social Security 60,517 4.97 68,177 5.70 (7,660) –12.66

Pension 20,675 1.70 23,473 1.96 (2,798) –13.53

Health Insurance 8,422 0.69 18,507 1.55 (10,085) –119.75

14.3 ANALYZING OPERATING DATA
Comparative analysis is an important tool for managers, and it is worth investing the time to
become familiar with both horizontal and vertical analysis. Managers will generally analyze
their own organization’s data most of the time (rather than performing comparisons against
other organizations). With that fact in mind, we examine operating room operating data (no
pun intended) that incorporate both common sizing and trend analysis.

Table 14–5
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch14_sect1_3#ch14_tbl5) sets out
32 expense items. The expense amount in dollars for each line item is set out for the current
year in the left column (beginning with $60,517). The expense amount in dollars for each
line item is set out for the prior year in the third column of the analysis (beginning with
$68,177). The difference in dollars, labeled “Annual Increase (Decrease),” appears in the
sixth column of the analysis (beginning with [$7,660]). Vertical analysis has been performed
for the current year, and the percentage results appear in the second column (beginning with
4.97%). Vertical analysis has also been performed for the prior year, and those percentage
results appear in the fourth column (beginning with 5.70%). Horizontal analysis has been
performed on each line item, and those percentage items appear in the far right column
(beginning with 12.66%). This table is a good example of the type of operating data reports
that managers receive for planning and control purposes.

Table 14–5 Vertical and Horizontal Analysis for the Operating Room

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Child Care 4,564 0.37 4,334 0.36 230 5.04

Patient
Accounting

155,356 12.76 123,254 10.30 32,102 20.66

Admitting 110,254 9.05 101,040 8.45 9,214 8.36

Medical Records 91,718 7.53 94,304 7.88 (2,586) –2.82

Dietary 27,526 2.26 35,646 2.98 (8,120) –29.50

Medical Waste 2,377 0.20 3,187 0.27 (810) –34.08

Sterile Procedures 78,720 6.46 70,725 5.91 7,995 10.16

Laundry 40,693 3.34 40,463 3.38 230 0.57

Depreciation—
Equipment

87,378 7.18 61,144 5.11 26,234 30.02

Depreciation—
Building

41,377 3.40 45,450 3.80 (4,073) –9.84

Amortization—
Interest

(5,819) –0.48 1,767 0.15 (7,586) 130.37

Insurance 4,216 0.35 7,836 0.65 (3,620) –85.86

Administration 57,966 4.76 56,309 4.71 1,657 2.86

Medical Staff 1,722 0.14 5,130 0.43 (3,408) –
197.91

Community
Relations

49,813 4.09 40,618 3.39 9,195 18.46

Materials
Management

64,573 5.30 72,305 6.04 (7,732) –11.97

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Human Resources 31,066 2.55 13,276 1.11 17,790 57.27

Nursing
Administration

82,471 6.77 92,666 7.75 (10,195) –12.36

Data Processing 17,815 1.46 16,119 1.35 1,696 9.52

Fiscal 17,700 1.45 16,748 1.40 952 5.38

Telephone 2,839 0.23 2,569 0.21 270 9.51

Utilities 26,406 2.17 38,689 3.23 (12,283) –46.52

Plant 77,597 6.37 84,128 7.03 (6,531) –8.42

Environmental
Services

32,874 2.70 37,354 3.12 (4,480) –13.63

Safety 2,016 0.17 2,179 0.18 (163) –8.09

Quality
Management

10,016 0.82 8,146 0.68 1,870 18.67

Medical Staff 9,444 0.78 9,391 0.78 53 0.56

Continuous
Quality
Improvement

4,895 0.40 0 0.00 4,895 100.00

EE Health 569 0.05 1,513 0.13 (944) –
165.91

Total Allocated 1,217,756 100.00 1,196,447 100.00 21,309 1.75

All Other
Expenses

1,211,608 — — — — —

Total Expense 2,429,364 — — — — —

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Comparative analysis is especially important to managers because it creates a common
ground to make judgments for planning, control, and decision-making purposes. Using
comparative data is the subject of the following chapter.

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14.4 IMPORTANCE OF FORECASTS
The dictionary defines “to forecast” as “to calculate or predict some future event or condition,
usually as a result of study and analysis of available pertinent data.”

From the manager’s viewpoint, forecasted data are information used for purposes of planning for
the future. Forecasting, to some degree or another, is often required when producing budgets.
(Budgets are the subject of two of the following chapters.) It is pretty simple today to create “what
if” scenarios on the computer. But the important thing for managers to remember is that
assumptions directly affect the results of forecasts.

Forecasts Versus Projections

Forecasts are different than projections, although both are considered to be “prospective” and thus
“future” financial statements. Forecasts are based on assumptions that are expected to exist, and
that reflect actions that are expected to occur. Projections, on the other hand, are views further into
the future. Because they are further into the future, we “project” future events, projects, or
operations using a set of presumed, or hypothetical, assumptions.

We are discussing forecasts in this chapter rather than projections. Therefore, these forecasts are
relatively short term and can be based on realistic assumptions that we expect to exist, along with
actions that we can reasonably expect to occur.

(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch14_sect1_9#ch14_ent1)

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Forecasting Approaches

The approach to producing a forecast usually involves three different sources of information and
forecast assumptions:

■ The first level derives from the personnel who are directly involved in the department
or unit. They know the operation and can provide important ground-level detail.

■ The second level comes from electronic and statistical information, including trend
analysis. Electronic reports can provide a thicket of information, and there is a skill to
selecting relevant information for forecasting purposes.

■ The third level represents executive-level judgment that is typically applied to a
preliminary rough draft of the forecast. For example, adjusting volume upward or
downward due to the anticipated future impact of local competition would most likely be
an executive-level judgment.

The amount and type of electronic information that is readily available greatly affects the forecast
difficulty. Electronic templates and standardized worksheets may also greatly influence the final
forecast results.

Common Types of Forecasts in Healthcare Organizations

The three most common types of forecasts found in most healthcare organizations include revenue
forecasts, staffing forecasts, and operating expense forecasts. (The operating expense forecast,
which is not as common, would generally cover those operating expenses other than labor.) This
section will discuss revenue and staffing forecasts, as they are what most managers will need to
deal with.

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14.5 OPERATING REVENUE FORECASTS
Operating revenue forecasts are inputs into the operating budget. Forecast types and their
assumptions are discussed in this section.

Types of Revenue Forecasts

Forecasts of revenue will cover varying time periods. Longer-range multi-year forecasts are useful
for executive decision making regarding the future of the organization. Figure 14–1
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch14_sect1_5#ch14_fig1) illustrates a
multi-year forecast.

Figure 14–1 Five-Year Operating Revenue Forecast.

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A single-year forecast is generally for the coming year and is thus a short-range forecast. Reliable
forecasts of revenue are a vital part of the organization’s planning process and are an input into the
operating budget. Figure 14–2
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch14_sect1_5#ch14_fig2) illustrates a
short-range forecast. Note that the graph in Figure 14–2
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch14_sect1_5#ch14_fig2) could be by
month instead of by quarter as shown.

Figure 14–2 One-Year Operating Revenue Forecast.

Building Revenue Forecast Assumptions

Five important issues regarding revenue forecast assumptions are discussed here.

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Utilization Assumptions

In health care, significant changes in utilization patterns can be occurring that need to be taken into
account in the manager’s forecast assumptions. The inexorable shift to shorter lengths of stay for
hospital inpatients over the last decade is an example of a basic shift in utilization patterns.

Patient Mix Assumptions

It is important to specify anticipated patient mix as well as his or her anticipated utilization or
volume. By “patient mix” we mean whether the individual is a Medicare patient, a Medicaid
patient, a patient covered by private insurance, or a private pay patient. When payers are thus
identified, this information allows the appropriate payments to be associated with the service
utilization assumptions.

Contractual Allowance Assumptions

The forecasted utilization of a service (or its volume) assumption is multiplied by the appropriate
rate, or charges, in order to arrive at forecasted revenue stated in dollars. A word of warning,
however: revenue forecasted at “gross charges” is not a valid figure. Instead, revenue stated at
“allowed charges” is the proper figure to use. Virtually all payers, including Medicare, Medicaid,
and private insurers, will pay a stipulated amount for a particular service. But the amounts these
different payers have agreed to pay for the same service will vary. How to handle the issue?
Through a contractual allowance, as defined here:

■ Gross Charge: Amount for a service as shown on the claim form; a uniform charge
generally greater than most expected payments received for the service.

■ Allowed Charge: Net amount that the particular payer’s contract or participation
agreement will recognize, or “allow,” for a certain service.

■ Contractual Allowance: Difference (between the gross charge and the allowed charge)
that is recorded as a reduction of the gross charge within the accounting cycle.

(It should also be noted that part of the payer’s allowed charge is generally due from the patient,
and the remaining portion of the allowed charge is actually due from the payer.)

Trend Analysis Assumptions

One of the basic purposes of performing trend analysis is to compare data between or among years
and to see the trends. If such trends are found, then it makes sense to take them into account in your
forecast. A word of warning, however: the manager must determine whether the data used for
comparison in the trend analysis are comparable data.

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Payer Change Assumptions

Trend analysis is retrospective; that is, it is using historical data from a past period. Forecasting is
prospective; that is, it is projecting into the future. If changes, say, in regulatory requirements for
payment are made this year, then that fact has to be taken into account.

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14.7 CAPACITY LEVEL ISSUES IN FORECASTING
In the manufacturing industry, capacity levels relate to the production of, say, widgets. In the world
of health care, capacity relates to services; that is, the ability to produce or provide specific
healthcare services.

Space and Equipment Availability

The ability to provide services is automatically limited by the availability of both space and the
proper equipment to provide certain specific services. Forecasts need to take a realistic view of
these capacity levels.

Staffing Availability

Capacity is a tricky assumption to make in staffing forecasts. In some programs, particularly those
in a startup phase, overcapacity (too much staff available for the amount of work required) is a
problem. In some other organizations, under capacity (a chronic lack of adequate staff) is the
problem. Forecasting assumptions, in the best of all worlds, take these difficulties into account. See
the Mini-Case Study that demonstrates this problem of staffing in the context of the Women,
Infants, and Children (WIC) federal program.

Example of Forecasting Maximum Service Capacity

Exhibit 14–1
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch14_sect1_7#ch14_exhibit1) illustrates
the array of elements that should be taken into account when computing maximum capacity levels.
This computation is important because your forecast should take maximum capacity into account.
(Alternative assumptions can also be made, of course. See the sensitivity analysis discussion in a
following chapter.)

Exhibit 14–1 Capacity Level Checkpoints for an Outpatient Infusion
Center

Outpatient Infusion Center Capacity Level Checkpoints

(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch14_sect1_9#ch14_ent2)

https://content.ashford.edu/books/Baker.6866.18.1/sections/ch14_sect1_7%23ch14_exhibit1

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# infusion chairs ……………………………… 3 chairs

# staff……………………………………………… 1 RN

# weekly operating hours ……………….. 40 hours

# of hours per patient infusion ………….. average 2 hours (for purposes of this example)

Work Flow Description

For each infusion the nurse must perform the following steps (generalized for this purpose;
actual protocol is more specific):

■ Obtain and review the patient’s chart

■ Obtain and prepare the appropriate drug for infusion

■ Interview the patient

■ Prepare the patient and commence the infusion

■ Monitor and record progress throughout the ongoing infusion

■ Observe the patient upon completion of the infusion

■ Complete charting

Work Flow Comments

It is impossible for one nurse to start patients’ infusions in all three chairs simultaneously. Thus
the theoretical treatment sequence might be as follows:

■ Assume one half-hour for patient number one’s Steps 1 through 4.

■ Once patient number one is at Step 5, the nurse can begin the protocol for

■ patient number two.

■ Assume another one half-hour for patient number two’s Steps 1 through 4.

■ Once patient number two is at Step 5, theoretically the nurse can begin the protocol
for patient number three.

This sequence should work, assuming all factors work smoothly; that is, the appropriate drugs in
the proper amounts are at hand, the patients show up on time, and no one patient demands an
unusual amount of the nurse’s attention. (For example, a new patient will require more

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attention.)

Daily Infusion Center Capacity Level Assumption

Patient scheduling is never entirely smooth, and patient reactions during infusions are never
predictable. Therefore, we realistically assume the following: Chair #1 = 3 patients per day,
Chair #2 = 2 patients per day, and Chair #3 = 2 patients per day, for a daily total of 7 patients
infused.

SUMMARY

In summary, the ultimate accuracy of a forecast rests on the strength of its assumptions.

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14.6 STAFFING FORECASTS
Staffing forecasts are also inputs into the operating budget. We have addressed staffing
computations, costs, and reports in a previous chapter. This section builds upon that information in
order to produce a staffing forecast. Thus forecast considerations, components, and assumptions are
addressed in this section.

Staffing Forecast Considerations

Staffing forecasts are a very common type of forecast required of managers. Three important
considerations when preparing staffing forecasts are discussed here.

Controllable Versus Noncontrollable Expenses

The concept of responsibility centers and controllable versus noncontrollable expenses has been
discussed earlier in this book. Essentially, controllable costs are subject to a manager’s own
decision making, whereas noncontrollable costs are outside that manager’s power. It is extremely
difficult to make staffing forecasts with any degree of accuracy if noncontrollable expenses are
included in the manager’s forecast. The organization’s structure must be recognized and taken into
account when setting up assumptions for staffing forecasts. Shared services across lines of authority
are workable in theory, but often do not work in actuality. Figure 14–3
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch14_sect1_6#ch14_fig3) gives an
example of the essential “business units” under the supervision of a director of nurses. Note the
responsibility centers and the support centers on this organization chart.

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Figure 14–3 Primary Nursing Staff Classification by Line of Authority.
Courtesy of Resource Group, Ltd., Dallas, Texas.

Required Minimum Staff Levels

Regulatory healthcare standards may set minimum staff levels for providing service in a particular
unit. These minimum levels cannot be ignored in the forecast process.

Labor Market Issues in Staffing Forecasts

We most often hear about a chronic lack of adequate staff, and certain parts of the country do have
a continual shortage of certain qualified professional healthcare staff. Yet other parts of the country
can have an overabundance during that same period. The status of the local labor market has a
direct impact on staffing forecasts. The impact is in dollars: when there are plenty of staff available,
the hourly rate to attract staff may go down, but when there is a shortage of available qualified staff,
the hourly rate has to go up. As strange as it may seem, this elemental economic fact is sometimes
not taken into account in forecasting assumptions.

Staffing Forecast Components

In many cases a staffing plan is first created, and the staffing forecast follows after the plan is
reviewed and refined. Four components are typically required, as follows. Figure 14–4
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch14_sect1_6#ch14_fig4) illustrates the
sequence.

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Figure 14–4 Components of the Staffing Forecast.

Scheduling Requirements

Scheduling requirements should encompass all hours and days required to cover each position. For
example, see the exhibit in the discussion about staffing (Chapter 10
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch10#ch10) ) that illustrates a single
security guard position and the number of units required.

Master Staffing Plan

The master staffing plan should include all units and all hours and days required to cover all
positions within the units. For example, see the exhibit in the discussion about staffing that
illustrates entire units by shift, covering 24 hours per day times 7 days a week.

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Computation Sequence to Annualize the Master Staffing Plan

The annualizing sequence is as follows. (This sequence is illustrated visually in Figure 14–4
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch14_sect1_6#ch14_fig4) . An example
in worksheet form appears in the chapter about staffing.)

■ Compute Productive and Nonproductive Days and Net Paid Days The proportion of
productive days (net paid days) versus nonproductive days (paid days not worked) will
be based on the organization’s policy as to paying for days not worked. For example, see
Step 1 in the Staffing chapter’s exhibit for such a computation, including “Net Paid
Days.” (Holidays, sick days, vacation days, and education days composed the “Paid Days
Not Worked” in the worksheet example within the Staffing chapter’s exhibit.)

■ Convert Net Paid Days Worked to an Annual Factor The total days in the business
year divided by net paid days worked equals a factor. Step 2 in the Staffing chapter’s
exhibit illustrates this computation.

■ Calculate the Annual FTEs Using the Factors Finally, use the factor to calculate the
FTEs required to fully cover the position’s shifts all year long. For example, in the
Staffing chapter’s exhibit, the RN FTE would be 1.6 (1.6106195).

The resulting staffing forecast reflects 24 hour per day 7 days per week annual FTEs to cover all
shifts.

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15.2 COMPARABILITY REQUIREMENTS
True comparability needs to meet three criteria: consistency, verification, and unit measurement.
Each is discussed in this section.

Consistency

Three equally important elements of consistency should be considered as follows.

Time Periods

Time periods should be consistent. For example, a 10-month period should not be compared to a
12-month period. Instead, the 10-month period should be annualized, as described within this
chapter.

Consistent Methodology

The same methods should be used across time periods. For example, the chapter about inventory
discusses the use of two inventory methods: first-in, first-out (FIFO) versus last-in, first-out (LIFO).
The same inventory method—one or the other—should always be used consistently for both the
beginning of the year and the end of the year.

Inflation Factors

Finally, if multiple years are being compared, should inflation be taken into account? The proper
application of an inflation factor is also described within this chapter.

Verification

Basically, can these data be verified? Is it reasonable? If an objective, qualified person reviewed the
data, would he or she arrive at the same conclusion and/or results? You may have to do a few tests
to determine if the data can in fact be verified. If so, you should retain your back-up data, because it
is the evidence that supports your conclusions about verification.

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Monetary Unit Measurement

With regard to comparative data, we should ask: “Is all the information being prepared or under
review measured by the same monetary unit?” In the United States, we would expect all the data to
be expressed in dollars and not in some other currency such as euros (used in much of Europe) or
pounds (used in Britain and the United Kingdom). Most of the manager’s data will automatically
meet this requirement. However, currency conversions are an important part of reporting financial
results for companies that have global operations, and consistency in applying such conversions can
be a significant factor in expressing financial results.

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15.3 A MANAGER’S VIEW OF COMPARATIVE DATA
It is important for the manager to always be aware of whether the data he or she is receiving (or
preparing) are appropriate for comparison. It is equally important for the manager to perform a
comprehensive review, as described here.

The Manager’s Responsibility

Whether you as a manager must either review or prepare required data, your responsibility is to
recall and apply the elements of consistency. Why? Because such data will typically be used for
decision making. If such data are not comparable, then relying upon them can result in poor
decisions, with financial consequences in the future. The actual mechanics of making a comparative
review are equally important. The deconstruction of a comparative budget review follows.

Comparative Budget Review

The manager needs to know how to effectively review comparative data. To do so, the manager
needs to understand, for example, how a budget report format is constructed. In general, the usual
operating expense budget that is under review will have a column for actual expenditures, a column
for budgeted expenditures, and a column for the difference between the two. Usually, the actual
expense column and the budget column will both have a vertical analysis of percentages (as
discussed in the preceding chapter). Each different line item will have a horizontal analysis (also
discussed in the preceding chapter) that measures the amount of the difference against the budget.

Table 15–1 (http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_3#ch15_tbl1)
illustrates the operating expense budget configuration just described. Notice that the “Difference”
column has both positive and negative numbers in it (the negative numbers being set off with
parentheses). Thus, the positive numbers indicate budget overage, such as the dietary line, which
had an actual expense of $405,000 against a budget figure of $400,000, resulting in a $5,000
difference. The next line is maintenance. This department did not exceed its budget, so the
difference is in parentheses; the maintenance budget amounted to $290,000, and actual expenses
were only $270,000, so the $20,000 difference is in parentheses. In this case, parentheses are good
(under budget) and no parentheses is bad (over budget).

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Hospital 1

Year 2 Actual Year 2 Budget Difference

General Services Expense $ % $ % $ %

Dietary $405,000 45 $400,000 46 $5,000 12.5

Maintenance 270,000 30 290,000 33 (20,000) (6.9)

Laundry 45,000 5 50,000 6 (5,000) (10.0)

Housekeeping 180,000 20 130,000 15 50,000 38.5

Total GS Expense $900,000 100 $870,000 100 $30,000 3.5

Table 15–1 Comparative Analysis of Budget Versus Actual

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Expenses

Account Account 10 Month Annualized 12 Month

Social Security 50,431 60,517

Pension 17,229 20,675

Health Insurance 7,018 8,42

Child Care 3,803 4,564

Patient Accounting 129,463 155,356

Admitting 91,878 110,254

Medical Records 76,432 91,718

Dietary 22,938 27,526

Medical Waste 1,981 2,377

Sterile Procedures 65,600 78,720

Laundry 33,911 40,69

Depreciation—Equipment 72,815 87,378

Depreciation—Building 34,481 41,377

Amortization—Interest (4,849) (5,819)

Insurance 3,513 4,216

Administration 48,305 57,966

Medical Staff 1,435 1,722

Community Relations 41,511 49,813

Materials Management 53,811 64,573

Human Resources 25,888 31,066

Nursing Administration 68,726 82,471

15.5 MAKING DATA COMPARABLE
This section discusses annualizing partial-year expenses, along with using inflation factors, standardized measures, and currency measures. The manager needs to
know how to make data comparable as a basis for properly preparing and/or reviewing budgets and reports.

Annualizing

Because comparability requires consistency, the manager needs to know how to annualize partial-year expenses. Table 15–2
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_5#ch15_tbl2) sets out the actual 10-month expenses for the operating room. But these expenses
are going to be compared against a 12-month budget. What to do? The actual 10-month expenses are converted, or annualized, to a 12-month basis, as shown in the
second column of Table 15–2 (http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_5#ch15_tbl2) .

Table 15–2 Annualizing Operating Room Partial-Year Expense

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Data Processing 14,846 17,815

Fiscal 14,750 17,700

Telephone 2,366 2,839

Utilities 22,005 26,406

Plant 64,664 77,597

Environmental Services 27,395 32,874

Safety 1,680 2,016

Quality Management 8,347 10,016

Medical Staff 7,870 9,444

Continuous Quality Improvement 4,079 4,895

EE Health 474 569

Total Allocated 1,014,796 1,217,756

All Other Expenses 1,009,673 1,211,608

Total Expense 2,024,469 2,429,364

Reproduced with the permission of Wolters Kluwer Law & Business from J.J. Baker, Activity-Based Costing and Activity-Based Management for Health Care, p.
190, © 1998, Aspen Publishers, Inc.

These computations were performed on a computer spreadsheet; however, the calculation is as follows. Using the first line as an example, $50,431 is 10-months worth
of expenses; therefore, 1 month’s expense is one-tenth of $50,431, or $5,043. To annualize for 12-months worth of expenses, the 10-month total of $50,431 is
increased by 2 more months at $5,043 apiece ($50,431 plus $5,043 for month 11, plus another $5,043 for month 12, equals $60,517, the annualized 12-month figure
for the year).

Inflation Factors

Inflation means “an increase in the volume of money and credit relative to available goods and services resulting in a continuing rise in the general price level.”
An inflation factor is used to compute the effect of inflation.

Let’s assume that hospital 1’s General Services expenses for year 1 were $800,000, versus $900,000 for year 2. We can assume that these amounts reflect actual dollars
expended in each year. But let us also now assume that inflation caused these expenses to rise by 5% in year 2. If the Chief Financial Officer (CFO) decides to take
such inflation into account, a government source will be available to provide the appropriate inflation rate. (The 5% in our example is for illustration only and does not
reflect an actual rate.)

The inflation factor for this example is expressed as a factor of 1.05 (1.00 plus 5% [expressed as.05] equals 1.05). The CFO might apply the inflation factor to year 1 in
order to give it a spending power basis equivalent to that of year 2. (Applying an inflation factor for a two-year comparison is not usually the case, but let us assume
the CFO has a good reason for doing so in this case.) The computation would thus be $800,000 year 1 expense times the 1.05 inflation factor equals an inflation-
adjusted year 1 expense figure of $840,000.

However, if the CFO wants to apply an inflation factor to a whole series of years, he or she must account for the cumulative effect over time. An example appears in
Table l5–3 (http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_5#ch15_tbl3) . We assume a base of $500,000 and an annual inflation rate of 10%.
The inflation factor for the first year is 10%, converted to 1.10, just as in the previous example, and $500,000 multiplied by 1.10 equals $550,000 in nominal dollars.

(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_6a#ch15_ent1)

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SOURCE OF FACTOR IN COLUMN C BELOW: From the Compound Interest Look-Up Table “The Future Amount of $1.00” (Appendix 13-B
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch13_app2#ch13_app2) )

Year Factors as shown at 10%

1 1.100

2 1.210

3 1.331

4 1.464

(A) (B) (C) (D)

Year Real
Dollars

Cumulative Inflation Factor*
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_5#ch15tabfn1)

Nominal Dollars**
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_5#ch15tabfn2)

1 $500,000 (1.10) = 1.100 $550,000

2 500,000 (1.10) = 1.210 605,000

3 500,000 (1.10) = 1.331 665,500

4 500,000 (1.10) = 1.464 732,050

*Assume an annual inflation rate of 10%. Thus 1.00 + 0.10 = the 1.10 factor in Column C.

**Column D “Nominal Dollars” equals Column B times Column C.

Table 15–3 Applying a Cumulative Inflation Factor

Beyond the first year, however, we must determine the cumulative inflation factor. For this purpose we turn to the Compound Interest Table. It shows “The Future
Amount of $1.00,” and appears in Appendix B of the chapter about time value of money. “The Future Amount of $1.00” table has years down the left side (vertical)
and percentages across the top (horizontal). We find the 10% column and read down it for years one, two, three, and so on.

As shown in Table 15–3.2 (http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_5#ch15_tbl3.2) , the factor for year 2 is 1.210, for year 3 is 1.331,
and so on. We carry those factors to column C of Table 15–3.1 (http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_5#ch15_tbl3) . Now we multiply
the $500,000 in column B times the factor for each year to arrive at the cumulative inflated amount in column D. Thus $500,000 times the year 2 factor of 1.210 equals
$605,000, and so on.

Table 15–3.2

1
2
3
4

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Country (or Area) Currency

Canada Canadian dollar

China Yuan

Euro Area Euro

Japan Yen

Mexico Peso

United Kingdom Pound

Exhibit 15–1 Foreign Currency Examples

Currency Measures

Monetary unit measurement, and the related currency measures and currency conversions, are typically beyond most manager’s responsibilities. Nevertheless, it is
important for the manager to understand that consistency in applying such measures and conversions will be a significant factor in expressing financial results of
companies that have global operations.

Therefore, for comparative purposes we must determine if all the information being prepared or under review is measured by the same monetary unit. A few foreign
currency examples are illustrated in Exhibit 15–1 (http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_5#ch15_exhibit1) . Currencies are typically
converted for financial reporting purposes using the U.S.dollar foreign exchange rates as of a certain date.

Exchange rates may be expressed in two ways: “in U.S. dollars” or “per U.S. dollars.” For example, assume the euro is trading at 1.3333 in U.S. dollars and at 0.7500
per U.S. dollars. That means if you were spending your U.S. dollar in, say, France (part of the “euro area”), it would take a third as much (1.33) in your dollars to buy
products priced in euros. If your French friend, on the other hand, was spending euros for products priced in U.S. dollars, he or she could buy one-quarter more for his
or her money (because the U.S. dollar would be worth only three quarters [0.7500] of the euro at that particular exchange rate).

Standardized Measures

A final word about standardized measures. Standardized measures aid comparability. They especially assist in performance measurement. Types of standardized
measures include the typical hospital per-bed measure along with work load measures.

There is, of course, a whole array of uses for standardized measures. Managed care plans, for example, may use a standard set of measures that are applied to every
physician who contracts with the plan. Each physician then receives a report from the plan that illustrates his or her performance.

Finally, electronic medical records (as further discussed in following chapters) depend upon standardized input. The input into various fields is standardized (and thus
made comparable) by the very nature of the electronic system design.

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15.4 USES OF COMPARATIVE DATA
Four common uses of comparisons that the manager will find helpful are discussed in this section.

Compare Current Expenses to Current Budget

Managers are most likely to be responsible for comparing the current expenses of their department,
division, unit, or program to their current budget. Of the four types of comparisons discussed in this
section, this is the one most commonly in use.

Table 15–1 (http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_3#ch15_tbl1)
illustrates a comparison of actual expenses versus budgeted expenses. This format reflects both
dollars and percentages, as is most common. Table 15–1
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_3#ch15_tbl1) shows the
grand totals for each department (Dietary, Maintenance, etc.) contained in General Services
expense for this hospital. There is, of course, a detailed budget for each of these departments that
adds up to the totals shown on Table 15–1
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_3#ch15_tbl1) . Thus, for
example, all the detailed expenses of the Laundry department (labor, supplies, etc.) are contained in
a supporting detailed budget whose total actual expenses amount to $45,000 and whose total
budgeted expenses amount to $50,000.

The department manager will be responsible for analyzing and managing the detailed budgets of his
or her own department. A manager at a higher level in the organization—the chief financial officer
(CFO), perhaps—will be responsible for making a comparative analysis of the overall operations of
the organization. This comparative analysis at a higher level will condense each department’s
details into a departmental grand total, as shown in Table 15–1
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_3#ch15_tbl1) , for
convenience and clarity in review.

The CFO may also convert this comparative data into charts or graphs in order to “tell the story” in
a more visual manner. For example, the total General Service expense in Table 15–1
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_3#ch15_tbl1) can be readily
converted into a graph. Figure 15–1
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_4#ch15_fig1) illustrates such
a graph.

https://content.ashford.edu/books/Baker.6866.18.1/sections/ch15_sect1_3%23ch15_tbl1

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Figure 15–1 A Comparison of Hospital One’s Budgeted and Actual Expenses.

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Compare Current Actual Expenses to Prior Periods in Own Organization

Trend analysis, as explained in the preceding chapter, allows comparison of current actual expenses
to expenses incurred in prior periods of the same organization. For example, consider total general
services expenses of $800,000 for year 1 and $900,000 for year 2. The CFO could easily convert
this information into a graph, as shown in Figure 15–2
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_4#ch15_fig2) . This
information might be even more valuable for decision-making input if the CFO used five years
instead of the two years that are shown here.

Figure 15–2 A Comparison of Hospital One’s Expenses Over Time.

Compare to Other Organizations

Common sizing, as explained in the preceding chapter, allows comparison of your organization to
other similar organizations. To illustrate, refer to the table in a preceding chapter (Table 14–1

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(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch14_sect1_1#ch14_tbl1) ) entitled
“Common Sizing Liability Information.” Here we see the liabilities of three hospitals that are the
same size expressed in both dollars and in percentages. Therefore, our CFO can convert the
percentages into an informative graph, as shown in Figure 15–3
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_4#ch15_fig3) .

Figure 15–3 A Comparison of Three 100-Bed Hospitals’ Long-Term Debt.

Be warned that the basis for some comparisons will be neither useful nor valid. For example, see
Figure 15–4 (http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_4#ch15_fig4) .
Here we have a graph of the grand totals from the table in a preceding chapter (Table 14–2
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch14_sect1_1#ch14_tbl2) ) entitled
“Common Sizing Expense Information.” The percentages shown are for the General Services
departments of each hospital and have been common sized to percentages, as is perfectly correct.
However, Figure 15–4
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_4#ch15_fig4) attempts to
compare the total General Services expense (the total of all four general services departments) in

https://content.ashford.edu/books/Baker.6866.18.1/sections/ch14_sect1_1%23ch14_tbl1

https://content.ashford.edu/books/Baker.6866.18.1/sections/ch15_sect1_4%23ch15_fig3

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https://content.ashford.edu/books/Baker.6866.18.1/sections/ch14_sect1_1%23ch14_tbl2

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dollars. As we can see here, hospital 1 and hospital 3 are both 100 beds, while hospital 2 is 400
beds. Obviously a 400-bed hospital will incur much more expense than a 100-bed hospital, so this
graph cannot possibly show a valid comparison among the three organizations.

Figure 15–4 A Comparison of Three Hospitals’ Total Expenses.

Instead, the CFO should find a standard measure that can be used as a valid basis for comparison.
In this case, he or she can choose size (number of beds) for this purpose. The resulting graph is
shown in Figure 15–5
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_4#ch15_fig5) . As you can
see, hospital 1’s cost per bed is $8,000, computed as follows. The total expense of $800,000 for
hospital 1 is divided by 100 beds (its size) to arrive at the $8,000 expense per bed shown on the
graph in Figure 15–5
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_4#ch15_fig5) . Hospital 2
($3,000,000 total expense divided by 400 beds to equal $7,500 per bed) and hospital 3 ($900,000
total expense divided by 100 beds to equal $9,000 per bed) have the same computations performed

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on their equivalent figures.

Figure 15–5 A Comparison of Three Hospitals’ Expenses per Bed.

In actual fact, another step in this computation should be performed in order to make the
comparisons completely valid. A per-bed computation implies inpatient expenses incurred, because
beds are occupied by admitted inpatients. (Outpatients, on the other hand, use a different mix of
services.) Therefore, a more accurate comparison would adjust the overall total expense using one
subtotal for inpatients and another subtotal for outpatients. Let us assume, for purposes of
illustration, that the CFO of hospital 1 has determined that 70% of General Services expense can be
attributed to inpatients and that the remaining 30% can be attributed to outpatients. Let us further
assume that hospital 1’s General Services expense of $800,000 as shown, is indeed a hospital-wide
expense. The CFO would then multiply $800,000 by 70% to arrive at $420,000, representing the
inpatient portion of General Services expense.

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Compare to Industry Standards

In the example just given in the paragraph above, the CFO has computed his or her own hospital’s
percentage of inpatient versus outpatient utilization of General Services expense. But this CFO may
not have any way to know these equivalent percentages for hospitals 2 and 3. If this is the case,
computing the per-bed expense using overall expense, as shown in Figure 15–5
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_4#ch15_fig5) , may be the
only way to show a three-hospital comparison.

The CFO, however, can use the 70% inpatient and 30% outpatient expense breakdown for another
type of comparison. It should be possible to find industry standards that break out inpatient versus
outpatient expense percentages. The use of industry standards is of particular use for decision
making because it positions the particular organization within a large grouping of facilities that
provide a similar set of services.

Healthcare organizations are particularly well suited to use industry standards because both the
federal and state governments release a wealth of public information and statistics regarding the
provision of health care. Figure 15–6
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_4#ch15_fig6) illustrates the
CFO’s graph using such a standard. (The figures shown are for illustration only and do not reflect
an actual standard.)

https://content.ashford.edu/books/Baker.6866.18.1/sections/ch15_sect1_4%23ch15_fig5

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Figure 15–6 A Comparison of Hospital One’s GS Inpatient Expenses with Industry Standards.

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15.6 CONSTRUCTING CHARTS TO SHOW THE DATA
Managers use charts to explain their projects and to report their results. Thus constructing accurate
and effective charts is a valuable skill.

Types of Charts

There are four basic chart styles as follows:

■ Column chart

■ Pie chart

■ Bar chart

■ Line chart

The column chart’s data is presented in vertical columns. The pie chart is typically circular (like a
pie, thus its name). The bar chart presents data in horizontal bars. The line chart generally uses
multiple lines that track along a grid. Figures 15-7
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_6#ch15_fig7) , 15-8,
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_6#ch15_fig8) and 15-9
(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_6#ch15_fig9) illustrate
examples of the pie chart, bar chart, and line chart respectively.

https://content.ashford.edu/books/Baker.6866.18.1/sections/ch15_sect1_6%23ch15_fig7

https://content.ashford.edu/books/Baker.6866.18.1/sections/ch15_sect1_6%23ch15_fig8

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Figure 15–7 Distribution of DRG 0xx Cases by Physician.
Modified from R. Hankins & J.J. Baker, Management Accounting for Health Care Organizations (Sudbury, MA: Jones &
Bartlett 2004). p. 375.

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Figure 15–8 Cost per Case by Physician for DRG 0xx.
Modified from R. Hankins & J.J. Baker, Management Accounting for Health Care Organizations (Sudbury, MA: Jones &
Bartlett 2004). p. 376.

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Figure 15–9 Total Cost per Case by Physician for DRG 0xx.
Modified from R. Hankins & J.J. Baker, Management Accounting for Health Care Organizations (Sudbury, MA: Jones &
Bartlett 2004). p. 377

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Chart Content and Format

Constructing the chart means answering a series of questions about content and format, as follows:

■ What is the subject of the chart?

■ What are the specific elements to be included?

■ What type of chart will best serve my purpose?

■ Is the information accurate and consistent?

■ If applicable, is the information comparable?

■ What are the dimensions of the chart?

■ If applicable, what is the span between high and low?

Chart Templates

A variety of chart templates are now available online. They are generally found within office suite
programs. Each template typically offers a drop-down menu for specifics of the format and a
second drop-down menu for the chart’s data input. Electronic templates also provide quick and easy
color choices for your chart presentation. You can experiment with various colors to reach the best
combination for your project.

To summarize, the chart you construct can be simple or elaborate. It can be black and white or it
can be multi-colored. But whatever its style, your chart must contain accurate and comparable data.

Metropolis Health System Balance Sheet March 31, 20X3 and 20X2

Assets

Current Assets

Cash and cash equivalents $1,150,000 $400,000

Assets whose use is limited 825,000 825,000

Patient accounts receivable 8,700,000 8,950,000

Less allowance for bad debts (1,300,000) (1,300,000)

Other receivables 150,000 100,000

Inventories of supplies 900,000 850,000

Prepaid expenses 200,000 150,000

Total Current Assets 10,625,000 9,975,000

Assets Whose Use Is Limited

Corporate funded depreciation 1,950,000 1,800,000

Under bond indenture agreements—held by trustee 1,425,000 1,475,000

Total Assets Whose Use Is Limited 3,375,000 3,275,000

Less Current Portion (825,000) (825,000)

Net Assets Whose Use Is Limited 2,550,000 2,450,000

APPENDIX 33-A: Metropolis Health System’s Financial Statements and
Excerpts from Notes

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Property, Plant, and Equipment, Net 19,300,000 19,200,000

Other Assets 325,000 375,000

Total Assets $32,800,000 $32,000,000

EXCERPTS FROM METROPOLIS HEALTH SYSTEM NOTES TO
FINANCIAL STATEMENTS

Note 1—Nature of Operations and Summary of Significant Accounting Policies

General

Metropolis Hospital System (Hospital) currently operates as a general acute care hospital.
The hospital is a municipal corporation and body politic created under the hospital district
laws of the state.

Cash and Cash Equivalents

For purposes of reporting cash flows, the hospital considers all liquid investments with an
original maturity of three months or less to be cash equivalents.

Inventory

Inventory consists of supplies used for patients and is stated as the lower of cost or market.
Cost is determined on the basis of most recent purchase price.

Investments

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Metropolis Health System Balance Sheet March 31, 20X3 and 20X2

Liabilities and Fund Balance

Current Liabilities

Current maturities of long-term debt $525,000 $500,000

Accounts payable and accrued expenses 4,900,000 5,300,000

Bond interest payable 300,000 325,000

Reimbursement settlement payable 100,000 175,000

Total Current Liabilities 5,825,000 6,300,000

Long-Term Debt 6,000,000 6,500,000

Less Current Portion of Long-Term Debt (525,000) (500,000)

Net Long-Term Debt 5,475,000 6,000,000

Total Liabilities 11,300,000 12,300,000

Fund Balances

General Fund 21,500,000 19,700,000

Total Fund Balances 21,500,000 19,700,000

Total Liabilities and Fund Balances $32,800,000 $32,000,000

Metropolis Health System Statement of Revenue and Expenses for the Years Ended March
31, 20X3 and 20X2

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Revenue

Net patient service revenue $34,000,000 $33,600,000

Other revenue 1,100,000 1,000,000

Total Operating Revenue 35,100,000 34,600,000

Expenses

Nursing services 5,025,000 5,450,000

Other professional services 13,100,000 12,950,000

General services 3,200,000 3,220,000

Support services 8,300,000 8,340,000

Depreciation 1,900,000 1,800,000

Amortization 50,000 50,000

Interest 325,000 350,000

Provision for doubtful accounts 1,500,000 1,600,000

Total Expenses 33,400,000 33,760,000

Income from Operations 1,700,000 840,000

Nonoperating Gains (Losses)

Unrestricted gifts and
memorials

20,000 70,000

Interest income 80,000 40,000

Nonoperating Gains, Net 100,000 110,000

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Revenue and Gains in Excess of
Expenses and Losses

$1,800,000 $950,000

Metropolis Health System Statement of Changes in Fund Balance for the Years Ended
March 31, 20X3 and 20X2

General Fund Balance April 1st $19,700,000 $18,750,000

Revenue and Gains in Excess of Expenses and Losses 1,800,000 950,000

General Fund Balance March 31st $21,500,000 $19,700,000

Metropolis Health System Schedule of Property, Plant, and Equipment for the Years Ended
March 31, 20X3 and 20X2

Buildings and Improvements $14,700,000 $14,000,000

Land Improvements 1,100,000 1,100,000

Equipment 28,900,000 27,600,000

Total 44,700,000 42,700,000

Less Accumulated Depreciation (26,100,000) (24,200,000)

Net Depreciable Assets 18,600,000 18,500,000

Land 480,000 480,000

Construction in Progress 220,000 220,000

Net Property, Plant, and Equipment $19,300,000 $19,200,000

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Metropolis Health System Schedule of Patient Revenue for the Years Ended March 31, 20X3
and 20X2

Patient Services Revenue

Routine revenue $9,850,000 $9,750,000

Laboratory 7,375,000 7,300,000

Radiology and CT scanner 5,825,000 5,760,000

OB–nursery 450,000 445,000

Pharmacy 3,175,000 3,140,000

Emergency service 2,200,000 2,180,000

Medical and surgical supply and IV 5,050,000 5,000,000

Operating rooms 5,250,000 5,200,000

Anesthesiology 1,600,000 1,580,000

Respiratory therapy 900,000 890,000

Physical therapy 1,475,000 1,460,000

EKG and EEG 1,050,000 1,040,000

Ambulance services 900,000 890,000

Oxygen 575,000 570,000

Home health and hospice 1,675,000 1,660,000

Substance abuse 375,000 370,000

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Other 775,000 765,000

Subtotal 48,500,000 48,000,000

Less Allowances and Charity Care 14,500,000 14,400,000

Net Patient Service Revenue $34,000,000 $33,600,000

Metropolis Health System Schedule of Operating Expenses for the Years Ended March 31,
20X3 and 20X2

Nursing Services

Routine Medical/Surgical $3,880,000 $4,200,000

Operating Room 300,000 325,000

Intensive Care Units 395,000 430,000

OB–Nursery 150,000 165,000

Other 300,000 330,000

Total $5,025,000 $5,450,000

Other Professional Services

Laboratory $2,375,000 $2,350,000

Radiology and CT Scanner 1,700,000 1,680,000

Pharmacy 1,375,000 1,360,000

Emergency Service 950,000 930,000

Medical and Surgical Supply 1,800,000 1,780,000

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Operating Rooms and Anesthesia 1,525,000 1,515,000

Respiratory Therapy 525,000 530,000

Physical Therapy 700,000 695,000

EKG and EEG 185,000 180,000

Ambulance Services 80,000 80,000

Substance Abuse 460,000 450,000

Home Health and Hospice 1,295,000 1,280,000

Other 130,000 120,000

Total $13,100,000 $12,950,000

General Services

Dietary $1,055,000 $1,060,000

Maintenance 1,000,000 1,010,000

Laundry 295,000 300,000

Housekeeping 470,000 475,000

Security 50,000 50,000

Medical Records 330,000 325,000

Total $3,200,000 $3,220,000

Support Services

General $4,600,000 $4,540,000

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Insurance 240,000 235,000

Payroll Taxes 1,130,000 1,180,000

Employee Welfare 1,900,000 1,950,000

Other 430,000 435,000

Total $8,300,000 $8,340,000

Depreciation $1,900,000 $1,800,000

Amortization 50,000 50,000

Interest Expense 325,000 350,000

Provision for Doubtful Accounts 1,500,000 1,600,000

Total Operating Expenses $33,400,000 $33,760,000

Investments, consisting primarily of debt securities, are carried at market value. Realized
and unrealized gains and losses are reflected in the statement of revenue and expenses.
Investment income from general fund investments is reported as nonoperating gains.

Income Taxes

As a municipal corporation of the state, the hospital is exempt from federal and state income
taxes under Section 115 of the Internal Revenue Code.

Property, Plant, and Equipment

Expenditures for property, plant, and equipment, and items that substantially increase the
useful lives of existing assets are capitalized at cost. The hospital provides for depreciation
on the straight-line method at rates designed to depreciate the costs of assets over estimated
useful lives as follows:

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Years

Equipment 5 to 20

Land Improvements 20 to 25

Buildings and Improvements 40

Funded Depreciation

The hospital’s Board of Directors has adopted the policy of designating certain funds that
are to be used to fund depreciation for the purpose of improvement, replacement, or
expansion of plant assets.

Unamortized Debt Issue Costs

Revenue bond issue costs have been deferred and are being amortized.

Revenue and Gains in Excess of Expenses and Losses

The statement of revenue and expenses includes revenue and gains in excess of expenses
and losses. Changes in unrestricted net assets that are excluded from excess of revenue over
expenses, consistent with industry practice, would include such items as contributions of
long-lived assets (including assets acquired using contributions that by donor restriction
were to be used for the purposes of acquiring such assets) and extraordinary gains and
losses. Such items are not present on the current financial statements.

Net Patient Service Revenue

Net patient service revenue is reported as the estimated net realizable amounts from patients,
third-party payers, and others for services rendered, including estimated retroactive
adjustments under reimbursement agreements with third-party payers. Retroactive
adjustments are accrued on an estimated basis in the period the related services are rendered
and adjusted in future periods as final settlements are determined.

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Contractual Agreements with Third-Party Payers

The hospital has contractual agreements with third-party payers, primarily the Medicare and
Medicaid programs. The Medicare program reimburses the hospital for inpatient ser-vices
under the Prospective Payment System, which provides for payment at predetermined
amounts based on the discharge diagnosis. The contractual agreement with the

Medicaid

program provides for reimbursement based upon rates established by the state, subject to
state appropriations. The difference between established customary charge rates and
reimbursement is accounted for as a contractual allowance.

Gifts and Bequests

Unrestricted gifts and bequests are recorded on the accrual basis as nonoperating gains.

Donated Services

No amounts have been reflected in the financial statements for donated services. The
hospital pays for most services requiring specific expertise. However, many individuals
volunteer their time and perform a variety of tasks that help the hospital with specific
assistance programs and various committee assignments.

Note 2—Cash and Investments

Statutes require that all deposits of the hospital be secured by federal depository insurance or
be fully collateralized by the banking institution in authorized investments. Authorized
investments include those guaranteed by the full faith and credit of the United States of
America as to principal and interest; or in bonds, notes, debentures, or other similar
obligations of the United States of America or its agencies; in interest-bearing savings
accounts or interest-bearing certificates of deposit; or in certain money market mutual funds.

At March 31, 20X3, the carrying amount and bank balance of the hospital’s deposits with
financial institutions were $190,000 and $227,000, respectively. The difference between the
carrying amount and the bank balance primarily represents checks outstanding at March 31,
20X3. All deposits are fully insured by the Federal Deposit Insurance Corporation or
collateralized with securities held in the hospital’s name by the hospital agent.

Note 3—Charity Care

The hospital voluntarily provides free care to patients who lack financial resources and are

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Carrying Amount

20X3 20X2

U.S. Government Securities or

U.S. Government Agency Securities $4,325,000 $3,575,000

Total Investments 4,325,000 3,575,000

Petty Cash 3,000 3,000

Deposits 190,000 93,000

Accrued Interest 7,000 4,000

Total 4,525,000 3,675,000

Consisting of Cash and Cash Equivalents—General Fund 1,150,000 400,000

Assets Whose Use Is Limited

Corporate Funded Depreciation 1,950,000 1,800,000

Held by Trustee Under Bond Indenture Agreements 1,425,000 1,475,000

Total $4,525,000 $3,675,000

deemed to be medically indigent. Such care is in compliance with the hospital’s mission.
Because the hospital does not pursue collection of amounts determined to qualify as charity
care, they are not reported as revenue.

The hospital maintains records to identify and monitor the level of charity care it provides.
These records include the amount of charges forgone for services and supplies furnished
under its charity care policy. During the years ended March 31, 20X3 and 20X2, such
charges forgone totaled $395,000 and $375,000, respectively.

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Page 12 of 17

20X3 20X2

Medicare 30.0% 28.5%

Medicaid 15.0 16.0

Patients 13.0 12.5

Other third-party payers 42.0 43.0

Total 100.0% 100.0%

Note 4—Net Patient Service Revenue

The hospital provides healthcare services through its inpatient and outpatient care facilities.
The mix of receivables from patients and third-party payers at March 31, 20X3 and 20X2, is
as follows:

The hospital has agreements with third-party payers that provide for payments to the
hospital at amounts different from its established rates. Contractual adjustments under third-
party reimbursement programs represent the difference between the hospital’s established
rates for services and amounts paid by third-party payers. A summary of the payment
arrangements with major third-party payers follows.

Medicare

Inpatient acute care rendered to Medicare program beneficiaries is paid at prospectively
determined rates-per-discharge. These rates vary according to a patient classification system
that is based on clinical, diagnostic, and other factors. Inpatient nonacute care services and
certain outpatient services are paid based upon either a cost reimbursement method,
established fee screens, or a combination thereof. The hospital is reimbursed for cost
reimbursable items at a tentative rate with final settlement determination after submission of
annual cost reports by the hospital and audits by the Medicare fiscal intermediary. At the
current year end, all Medicare settlements for the previous two years are subject to audit and
retroactive adjustments.

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Page 13 of 17

20X3 20X2

Amount % Amount %

Medicare $20,850,000 43.0 $19,900,000 42.0

Medicaid 10,190,000 21.0 10,200,000 21.5

All other payers 17,460,000 36.0 17,300,000 36.5

$48,500,000 100.0 $47,400,000 100.0

Medicaid

Inpatient services rendered to Medicaid program beneficiaries are reimbursed at
prospectively determined rates-per-day. Outpatient services rendered to Medicaid program
beneficiaries are reimbursed at prospectively determined rates-per-visit.

Blue Cross

Inpatient services rendered to Blue Cross subscribers are reimbursed under a cost
reimbursement methodology. The hospital is reimbursed at a tentative rate with final
settlement determined after submission of annual cost reports by the hospital and audits by
Blue Cross. The Blue Cross cost report for the prior year end is subject to audit and
retroactive adjustment.

The hospital has also entered into payment agreements with certain commercial insurance
carriers, health maintenance organizations, and preferred provider organizations. The bases
for payment under these agreements include discounts from established charges and
prospectively determined daily rates.

Gross patient service revenue for services rendered by the hospital under the Medicare,
Medicaid, and Blue Cross payment agreements for the years ended March 31, 20X3 and
20X2, is approximately as follows:

Note 5—Property, Plant, and Equipment

The hospital’s property, plant, and equipment at March 31, 20X3 and 20X2, are as follows:

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Page 14 of 17

20X3 20X2

Buildings and improvements $14,700,000 $14,000,000

Land improvements 1,100,000 1,100,000

Equipment 28,900,000 27,600,000

Total $44,700,000 $42,700,000

Accumulated depreciation (26,100,000) (24,200,000)

Net Depreciable Assets $18,600,000 $18,500,000

Land 480,000 480,000

Construction in progress 220,000 220,000

Net Property, Plant, Equipment $19,300,000 $19,200,000

Hospital Facility Revenue Bonds (Series 1995) at varying interest
rates from 4.5% to 5.5%, depending on date of maturity through
2020.

20X3
$6,000,000

20X2
$6,500,000

Construction in progress, which involves a renovation project, has not progressed in the last
12-month period because of a zoning dispute. The project will not require significant outlay
to reach completion, as anticipated additional expenditures are currently estimated at
$100,000.

Note 6—Long-Term Debt

Long-term debt consists of the following:

The future maturities of long-term debt are as follows:

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Years Ending March 31

20X2 $ 475,000

20X3 500,000

20X4 525,000

20X5 550,000

20X6 575,000

20X7 600,000

Thereafter 3,750,000

Under the terms of the trust indenture the following funds (held by the trustee) were
established: an interest fund, a bond sinking fund, and a debt service reserve fund.

Interest Fund

The hospital deposits (monthly) into the interest fund an amount equal to one-sixth of the
next semi-annual interest payment due on the bonds.

Bond Sinking Fund

The hospital deposits (monthly) into the bond sinking fund an amount equal to one-twelfth
of the principal due on the next July 1.

Debt Service Reserve Fund

The debt service reserve fund must be maintained at an amount equal to 10% of the
aggregate principal amount of all bonds then outstanding. It is to be used to make up any
deficiencies in the interest fund and bond sinking fund.

Assets held by the trustee under the trust indenture at March 31, 20X3 and 20X2, are as
follows:

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Page 16 of 17

20X3 20X2

Interest Fund $ 300,000 $ 325,000

Bond Sinking Fund 525,000 500,000

Debt Service Reserve 600,000 650,000

Total $1,425,000 $1,475,000

Note 7—Commitments

At March 31, 20X3, the hospital had commitments outstanding for a renovation project at
the hospital of approximately $100,000. Construction in progress on the renovation has not
progressed in the last 12-month period because of a zoning dispute. Upon resolution of the
dispute, remaining construction costs will be funded from corporate funded depreciation
cash reserves.

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APPENDIX 13-B: Compound Interest Table Compound Interest of $1.00 (The Future Amount of
$1.00)

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Page 1 of 3

Year 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

1 1.010 1.020 1.030 1.040 1.050 1.060 1.070 1.080 1.090 1.100

2 1.020 1.040 1.061 1.082 1.102 1.124 1.145 1.166 1.188 1.210

3 1.030 1.061 1.093 1.125 1.156 1.191 1.225 1.260 1.295 1.331

4 1.041 1.082 1.126 1.170 1.216 1.262 1.311 1.360 1.412 1.464

5 1.051 1.104 1.159 1.217 1.276 1.338 1.403 1.469 1.539 1.611

6 1.062 1.120 1.194 1.265 1.340 1.419 1.501 1.587 1.677 1.772

7 1.072 1.149 1.230 1.316 1.407 1.504 1.606 1.714 1.828 1.949

8 1.083 1.172 1.267 1.369 1.477 1.594 1.718 1.851 1.993 2.144

9 1.094 1.195 1.305 1.423 1.551 1.689 1.838 1.999 2.172 2.358

10 1.105 1.219 1.344 1.480 1.629 1.791 1.967 2.159 2.367 2.594

11 1.116 1.243 1.384 1.539 1.710 1.898 2.105 2.332 2.580 2.853

12 1.127 1.268 1.426 1.601 1.796 2.012 2.252 2.518 2.813 3.138

13 1.138 1.294 1.469 1.665 1.886 2.133 2.410 2.720 3.066 3.452

14 1.149 1.319 1.513 1.732 1.980 2.261 2.579 2.937 3.342 3.797

15 1.161 1.346 1.558 1.801 2.079 2.397 2.759 3.172 3.642 4.177

16 1.173 1.373 1.605 1.873 2.183 2.540 2.952 3.426 3.970 4.595

17 1.184 1.400 1.653 1.948 2.292 2.693 3.159 3.700 4.328 5.054

18 1.196 1.428 1.702 2.026 2.407 2.854 3.380 3.996 4.717 5.560

19 1.208 1.457 1.754 2.107 2.527 3.026 3.617 4.316 5.142 6.116

20 1.220 1.486 1.806 2.191 2.653 3.207 3.870 4.661 5.604 6.728

25 1.282 1.641 2.094 2.666 3.386 4.292 5.427 6.848 8.632 10.835

30 1.348 1.811 2.427 3.243 4.322 5.743 7.612 10.063 13.268 17.449

1/2/20, 7:11 PM
Page 2 of 3

Year 12% 14% 16% 18% 20% 24% 28% 32% 40% 50%

1 1.120 1.140 1.160 1.180 1.200 1.240 1.280 1.320 1.400 1.500

2 1.254 1.300 1.346 1.392 1.440 1.538 1.638 1.742 1.960 2.250

3 1.405 1.482 1.561 1.643 1.728 1.907 2.067 2.300 2.744 3.375

4 1.574 1.689 1.811 1.939 2.074 2.364 2.684 3.036 3.842 5.062

5 1.762 1.925 2.100 2.288 2.488 2.932 3.436 4.007 5.378 7.594

6 1.974 2.195 2.436 2.700 2.986 3.635 4.398 5.290 7.530 11.391

7 2.211 2.502 2.826 3.185 3.583 4.508 5.629 6.983 10.541 17.086

8 2.476 2.853 3.278 3.759 4.300 5.590 7.206 9.217 14.758 25.629

9 2.773 3.252 3.803 4.435 5.160 6.931 9.223 12.166 20.661 38.443

10 3.106 3.707 4.411 5.234 6.192 8.594 11.806 16.060 28.925 57.665

11 3.479 4.226 5.117 6.176 7.430 10.657 15.112 21.199 40.496 86.498

12 3.896 4.818 5.936 7.288 8.916 13.215 19.343 27.983 56.694 129.746

13 4.363 5.492 6.886 8.599 10.699 16.386 24.759 36.937 79.372 194.619

14 4.887 6.261 7.988 10.147 12.839 20.319 31.691 48.757 111.120 291.929

15 5.474 7.138 9.266 11.074 15.407 25.196 40.565 64.350 155.568 437.894

16 6.130 8.137 10.748 14.129 18.488 31.243 51.923 84.954 217.795 656.840

17 6.866 9.276 12.468 16.672 22.186 38.741 66.461 112.140 304.914 985.260

18 7.690 10.575 14.463 19.673 26.623 48.039 85.071 148.020 426.879 1477.900

19 8.613 12.056 16.777 23.214 31.948 59.568 108.890 195.390 597.630 2216.800

20 9.646 13.743 19.461 27.393 38.338 73.864 139.380 257.920 836.683 3325.300

25 17.000 26.462 40.874 62.669 95.396 216.542 478.900 1033.600 4499.880 25251.000

30 29.960 50.950 85.850 143.371 237.376 634.820 1645.500 4142.100 24201.432 191750.000

1/2/20, 7:11 PM
Page 3 of 3

Metropolis Health System Balance Sheet March 31, 20X3 and 20X2

Assets

Current Assets

Cash and cash equivalents $1,150,000 $400,000

Assets whose use is limited 825,000 825,000

Patient accounts receivable 8,700,000 8,950,000

Less allowance for bad debts (1,300,000) (1,300,000)

Other receivables 150,000 100,000

Inventories of supplies 900,000 850,000

Prepaid expenses 200,000 150,000

Total Current Assets 10,625,000 9,975,000

Assets Whose Use Is Limited

Corporate funded depreciation 1,950,000 1,800,000

Under bond indenture agreements—held by trustee 1,425,000 1,475,000

Total Assets Whose Use Is Limited 3,375,000 3,275,000

Less Current Portion (825,000) (825,000)

Net Assets Whose Use Is Limited 2,550,000 2,450,000

APPENDIX 33-A: Metropolis Health System’s Financial Statements and
Excerpts from Notes

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Page 1 of 17

Property, Plant, and Equipment, Net 19,300,000 19,200,000

Other Assets 325,000 375,000

Total Assets $32,800,000 $32,000,000

EXCERPTS FROM METROPOLIS HEALTH SYSTEM NOTES TO
FINANCIAL STATEMENTS

Note 1—Nature of Operations and Summary of Significant Accounting Policies

General

Cash and Cash Equivalents

For purposes of reporting cash flows, the hospital considers all liquid investments with an
original maturity of three months or less to be cash equivalents.

Inventory

Inventory consists of supplies used for patients and is stated as the lower of cost or market.
Cost is determined on the basis of most recent purchase price.

Investments

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Metropolis Health System Balance Sheet March 31, 20X3 and 20X2

Liabilities and Fund Balance

Current Liabilities

Current maturities of long-term debt $525,000 $500,000

Accounts payable and accrued expenses 4,900,000 5,300,000

Bond interest payable 300,000 325,000

Reimbursement settlement payable 100,000 175,000

Total Current Liabilities 5,825,000 6,300,000

Long-Term Debt 6,000,000 6,500,000

Less Current Portion of Long-Term Debt (525,000) (500,000)

Net Long-Term Debt 5,475,000 6,000,000

Total Liabilities 11,300,000 12,300,000

Fund Balances

General Fund 21,500,000 19,700,000

Total Fund Balances 21,500,000 19,700,000

Total Liabilities and Fund Balances $32,800,000 $32,000,000

Metropolis Health System Statement of Revenue and Expenses for the Years Ended March
31, 20X3 and 20X2

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Page 3 of 17

Revenue

Net patient service revenue $34,000,000 $33,600,000

Other revenue 1,100,000 1,000,000

Total Operating Revenue 35,100,000 34,600,000

Expenses

Nursing services 5,025,000 5,450,000

Other professional services 13,100,000 12,950,000

General services 3,200,000 3,220,000

Support services 8,300,000 8,340,000

Depreciation 1,900,000 1,800,000

Amortization 50,000 50,000

Interest 325,000 350,000

Provision for doubtful accounts 1,500,000 1,600,000

Total Expenses 33,400,000 33,760,000

Income from Operations 1,700,000 840,000

Nonoperating Gains (Losses)

Unrestricted gifts and
memorials

20,000 70,000

Interest income 80,000 40,000

Nonoperating Gains, Net 100,000 110,000

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Page 4 of 17

Revenue and Gains in Excess of
Expenses and Losses

$1,800,000 $950,000

Metropolis Health System Statement of Changes in Fund Balance for the Years Ended
March 31, 20X3 and 20X2

General Fund Balance April 1st $19,700,000 $18,750,000

Revenue and Gains in Excess of Expenses and Losses 1,800,000 950,000

General Fund Balance March 31st $21,500,000 $19,700,000

Metropolis Health System Schedule of Property, Plant, and Equipment for the Years Ended
March 31, 20X3 and 20X2

Buildings and Improvements $14,700,000 $14,000,000

Land Improvements 1,100,000 1,100,000

Equipment 28,900,000 27,600,000

Total 44,700,000 42,700,000

Less Accumulated Depreciation (26,100,000) (24,200,000)

Net Depreciable Assets 18,600,000 18,500,000

Land 480,000 480,000

Construction in Progress 220,000 220,000

Net Property, Plant, and Equipment $19,300,000 $19,200,000

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Page 5 of 17

Metropolis Health System Schedule of Patient Revenue for the Years Ended March 31, 20X3
and 20X2

Patient Services Revenue

Routine revenue $9,850,000 $9,750,000

Laboratory 7,375,000 7,300,000

Radiology and CT scanner 5,825,000 5,760,000

OB–nursery 450,000 445,000

Pharmacy 3,175,000 3,140,000

Emergency service 2,200,000 2,180,000

Medical and surgical supply and IV 5,050,000 5,000,000

Operating rooms 5,250,000 5,200,000

Anesthesiology 1,600,000 1,580,000

Respiratory therapy 900,000 890,000

Physical therapy 1,475,000 1,460,000

EKG and EEG 1,050,000 1,040,000

Ambulance services 900,000 890,000

Oxygen 575,000 570,000

Home health and hospice 1,675,000 1,660,000

Substance abuse 375,000 370,000

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Page 6 of 17

Other 775,000 765,000

Subtotal 48,500,000 48,000,000

Less Allowances and Charity Care 14,500,000 14,400,000

Net Patient Service Revenue $34,000,000 $33,600,000

Metropolis Health System Schedule of Operating Expenses for the Years Ended March 31,
20X3 and 20X2

Nursing Services

Routine Medical/Surgical $3,880,000 $4,200,000

Operating Room 300,000 325,000

Intensive Care Units 395,000 430,000

OB–Nursery 150,000 165,000

Other 300,000 330,000

Total $5,025,000 $5,450,000

Other Professional Services

Laboratory $2,375,000 $2,350,000

Radiology and CT Scanner 1,700,000 1,680,000

Pharmacy 1,375,000 1,360,000

Emergency Service 950,000 930,000

Medical and Surgical Supply 1,800,000 1,780,000

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Page 7 of 17

Operating Rooms and Anesthesia 1,525,000 1,515,000

Respiratory Therapy 525,000 530,000

Physical Therapy 700,000 695,000

EKG and EEG 185,000 180,000

Ambulance Services 80,000 80,000

Substance Abuse 460,000 450,000

Home Health and Hospice 1,295,000 1,280,000

Other 130,000 120,000

Total $13,100,000 $12,950,000

General Services

Dietary $1,055,000 $1,060,000

Maintenance 1,000,000 1,010,000

Laundry 295,000 300,000

Housekeeping 470,000 475,000

Security 50,000 50,000

Medical Records 330,000 325,000

Total $3,200,000 $3,220,000

Support Services

General $4,600,000 $4,540,000

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Page 8 of 17

Insurance 240,000 235,000

Payroll Taxes 1,130,000 1,180,000

Employee Welfare 1,900,000 1,950,000

Other 430,000 435,000

Total $8,300,000 $8,340,000

Depreciation $1,900,000 $1,800,000

Amortization 50,000 50,000

Interest Expense 325,000 350,000

Provision for Doubtful Accounts 1,500,000 1,600,000

Total Operating Expenses $33,400,000 $33,760,000

Income Taxes

As a municipal corporation of the state, the hospital is exempt from federal and state income
taxes under Section 115 of the Internal Revenue Code.

Property, Plant, and Equipment

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Page 9 of 17

Years

Equipment 5 to 20

Land Improvements 20 to 25

Buildings and Improvements 40

Funded Depreciation

Unamortized Debt Issue Costs

Revenue bond issue costs have been deferred and are being amortized.

Revenue and Gains in Excess of Expenses and Losses

Net Patient Service Revenue

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Contractual Agreements with Third-Party Payers

Medicaid

Gifts and Bequests

Unrestricted gifts and bequests are recorded on the accrual basis as nonoperating gains.

Donated Services

Note 2—Cash and Investments

Note 3—Charity Care

The hospital voluntarily provides free care to patients who lack financial resources and are

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Carrying Amount

20X3 20X2

U.S. Government Securities or

U.S. Government Agency Securities $4,325,000 $3,575,000

Total Investments 4,325,000 3,575,000

Petty Cash 3,000 3,000

Deposits 190,000 93,000

Accrued Interest 7,000 4,000

Total 4,525,000 3,675,000

Consisting of Cash and Cash Equivalents—General Fund 1,150,000 400,000

Assets Whose Use Is Limited

Corporate Funded Depreciation 1,950,000 1,800,000

Held by Trustee Under Bond Indenture Agreements 1,425,000 1,475,000

Total $4,525,000 $3,675,000

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Page 12 of 17

20X3 20X2

Medicare 30.0% 28.5%

Medicaid 15.0 16.0

Patients 13.0 12.5

Other third-party payers 42.0 43.0

Total 100.0% 100.0%

Note 4—Net Patient Service Revenue

The hospital provides healthcare services through its inpatient and outpatient care facilities.
The mix of receivables from patients and third-party payers at March 31, 20X3 and 20X2, is
as follows:

Medicare

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Page 13 of 17

20X3 20X2

Amount % Amount %

Medicare $20,850,000 43.0 $19,900,000 42.0

Medicaid 10,190,000 21.0 10,200,000 21.5

All other payers 17,460,000 36.0 17,300,000 36.5

$48,500,000 100.0 $47,400,000 100.0

Medicaid

Blue Cross

Note 5—Property, Plant, and Equipment

The hospital’s property, plant, and equipment at March 31, 20X3 and 20X2, are as follows:

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Page 14 of 17

20X3 20X2

Buildings and improvements $14,700,000 $14,000,000

Land improvements 1,100,000 1,100,000

Equipment 28,900,000 27,600,000

Total $44,700,000 $42,700,000

Accumulated depreciation (26,100,000) (24,200,000)

Net Depreciable Assets $18,600,000 $18,500,000

Land 480,000 480,000

Construction in progress 220,000 220,000

Net Property, Plant, Equipment $19,300,000 $19,200,000

Hospital Facility Revenue Bonds (Series 1995) at varying interest
rates from 4.5% to 5.5%, depending on date of maturity through
2020.

20X3
$6,000,000

20X2
$6,500,000

Note 6—Long-Term Debt

Long-term debt consists of the following:

The future maturities of long-term debt are as follows:

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Years Ending March 31

20X2 $ 475,000

20X3 500,000

20X4 525,000

20X5 550,000

20X6 575,000

20X7 600,000

Thereafter 3,750,000

Under the terms of the trust indenture the following funds (held by the trustee) were
established: an interest fund, a bond sinking fund, and a debt service reserve fund.

Interest Fund

The hospital deposits (monthly) into the interest fund an amount equal to one-sixth of the
next semi-annual interest payment due on the bonds.

Bond Sinking Fund

The hospital deposits (monthly) into the bond sinking fund an amount equal to one-twelfth
of the principal due on the next July 1.

Debt Service Reserve Fund

Assets held by the trustee under the trust indenture at March 31, 20X3 and 20X2, are as
follows:

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Page 16 of 17

20X3 20X2

Interest Fund $ 300,000 $ 325,000

Bond Sinking Fund 525,000 500,000

Debt Service Reserve 600,000 650,000

Total $1,425,000 $1,475,000

Note 7—Commitments

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Periods 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% Periods

1 0.980 0.962 0.943 0.926 0.909 0.893 0.877 0.862 0.848 0.833 1

2 1.942 1.886 1.833 1.783 1.736 1.690 1.647 1.605 1.566 1.528 2

3 2.884 2.775 2.673 2.577 2.487 2.402 2.322 2.246 2.174 2.107 3

4 3.808 3.630 3.465 3.312 3.170 3.037 2.914 2.798 2.690 2.589 4

5 4.713 4.452 4.212 3.993 3.791 3.605 3.433 3.274 3.127 2.991 5

6 5.601 5.242 4.917 4.623 4.355 4.111 3.889 3.685 3.498 3.326 6

7 6.472 6.002 5.582 5.206 4.868 4.564 4.288 4.039 3.812 3.605 7

8 7.325 6.733 6.210 5.747 5.335 4.968 4.639 4.344 4.078 3.837 8

9 8.162 7.435 6.802 6.247 5.759 5.328 4.946 4.607 4.303 4.031 9

10 8.983 8.111 7.360 6.710 6.145 5.650 5.216 4.833 4.494 4.193 10

15 12.849 11.118 9.712 8.560 7.606 6.811 6.142 5.576 5.092 4.676 15

20 16.351 13.590 11.470 9.818 8.514 7.469 6.623 5.929 5.353 4.870 20

25 19.523 15.622 12.783 10.675 9.077 7.843 6.873 6.097 5.467 4.948 25

APPENDIX 13-C: Present Value of an Annuity of $1.00

1/2/20, 7:12 PM
Page 1 of 1

Page 7 of 7

WEEK 4 ASSIGNMENT

ENTER YOUR NAME IN THE BOX ABOVE

FINANCIAL AND OPERATING RATIOS

INSTRUCTIONS: Review Chapters 11, 12, & 13 before completing the template. You will be utilizing Dr. Smith and Dr. Brown’s Physician Practice financial statements for completing the financial ratio calculations. In addition, you will utilize the Ratio Benchmark & Median Table below as well as the textbook appendices 13A, and 13C to complete the operating ratio calculations. Refer to the Week 4 Assignment directions within the course to understand what is expected in each part of the table below. Thorough explanations and definitions for each section are required. If you include enough detail for each section, the template document will be at least seven pages in length. Include APA citations within the Response Column where appropriate. List your references in APA format on the last row of this template. All citations and references must be in APA style.

Use the Ratio Benchmark and Median Table below in Part 3 for your analysis on Dr. Smith and Dr. Brown’s financial health status.

RATIO BENCHMARK AND MEDIAN TABLE

Ratio

Benchmark – 50th Percentile) for Comparable Physician Group Practices

Median for Comparable Physician Group Practices

Current Ratio

*2.2

Quick Ratio

*1.74

Debt Service Coverage Ratio

*1.49

1.1

Operating Margin

*4.45

2.6

Return on Total Assets

*4.04%

4.05%

*Benchmark Data: 50th Percentile Information extrapolated from Appendix 33B Case Study.

PART 1:

CALCULATION of FINANCIAL RATIOS:

Below are five financial ratios. In each of the columns, you will be responsible for showing the calculation for each based off Dr. Smith and Brown’s financial statements (located with the textbook). You will need to identify the type of ratio as well. Choices for the type of ratio are:
LIQUIDITY, SOLVENCY, PROFITABILITY or N/A.

EXAMPLE for the INVENTORY TURNOVER RATIO:
Show Calculation: 180,000/5000 = 36
Identify the type of ratio: n/a

CURRENT RATIO

QUICK RATIO

DEBT SERVICE COVERAGE RATIO

OPERATING MARGIN

RETURN ON TOTAL ASSETS

Show calculation in the box provided:

Identify the type of ratio:

Show calculation in the box provided:

Identify the type of ratio:

Show calculation: (For this ratio, the denominator you will use is 22,200)

Identify the type of ratio:

Show calculation in the box provided:

Identify the type of ratio:

Show calculation in the box provided:

Identify the type of ratio:

PART 2:

TYPE OF RATIOS

In your own words, define the meaning of each ratio: liquidity, solvency, and profitability.

Liquidity

Solvency

Profitability

PART 3:

OPERATING RATIOS

Define the financial ratios listed below. Next, analyze the result for each ratio calculated above and explain what the calculated result tells you about the financial health of Dr. Smith and Dr. Brown’s physician practice

EXAMPLE:
INVENTORY TURNOVER RATIO

DEFINE: Inventory turnover is calculated to determine how quickly the inventory is used based on the services rendered. If the inventory turnover is high, this means the hospital does not have enough inventories on hand to accommodate the patient load. ANALYSIS: For this example, the hospital is turning over their inventory 36 times per year, which is about 3 times a month. The opposite is true if the inventory turnover calculation is lower than the median. FINANCIAL HEALTH: This could mean that there is a build-up of inventory due to lower than expected patient revenues.

1) CURRENT RATIO

2) QUICK RATIO

3) DEBT SERVICE COVERAGE RATIO

4) OPERATING MARGIN

5) RETURN ON TOTAL ASSETS

PART 4:

CAPITAL BUDGET EXPENDITURES – TIME VALUE OF MONEY CALCULATIONS

Complete the tables below by computing the following time value of money calculations: Present Value, Internal Rate of Return, and Pay Back Period for the capital expenditures for Dr. Smith and Brown’s physician practice. Enter the result of the calculation into the blank cells.

PRESENT VALUE

CE/Amount

Compounding Period

Rate of Interest

Present Value

Laboratory: $70,000

Annual

4% for 15 years

EMR Software: $125,000

Annual

6% for 10 years

INTERNAL RATE OF RETURN

Initial cost of Investment

Periods of Useful life

Estimated annual net cash inflow generated

Look-up table value

Rate of Interest

e-prescribing software:
$ 75,000

$10,190

Lab equipment: $ 58,000

$14,108

PAY BACK PERIOD

(assume no taxes are being paid)

Equipment Purchase Price

Period of Useful Life

Increased Annual Revenue Generated per Year

Operating Costs Associated with Revenue

Depreciation Expense per Year

Pay Back Period

EMR System: $350,000

10 years

$100,000

$32,000

$45,000

Integrated Billing System: $300,000

10 years

$95,000

$27,000

$36,000

PART 5:

EVALUATION OF CAPITAL BUDGET EXPENDITURES

As a Health Care Manager, you will be responsible for operational decisions by applying financial management principals. For Part 5, you will apply the concepts of the Time Value of Money to define, analyze, and rationalize your findings from the Financial and Operation ratio results to make informed decisions regarding capital expenditures for Dr. Smith and Brown’s physician practice. Include any government or regulatory mandate information that you considered when making your decision. Complete each of the cells below.

Define the time value of money.

Provide a real-world example for the time value of money.

Why is time such an important factor when considering a capital expenditure?

After review of the financial statements and ratios, analyze the feasibility that the Capital Expenditure listed above would benefit Dr. Smith and Dr. Brown’s practice. Explain your rationale on whether you would recommend the purchase of the capital expenditures identified. Include any positive or negative aspects of regulatory or government mandates that were considered in making the decision to purchase the capital expenditures.

REFERENCES

List the references you used to complete this assignment.
You must format the references in APA format as outlined in 6th edition guidelines found at the AU Writing Center. Comment by Author: Link to AU Writing Center APA formattingURL is: https://awc.ashford.edu/cd-apa-key-elements.html

HCA312 6/12/2018

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