Finance

Part 1: Statement of Operations and Financial Statements

Statement of Operations and Financial Statements
1. List several efforts that have been enacted by payors to control costs.
Explain the ramifications of allowing/disallowing an individual to be able to sue his or her HMO.

2. What are each of the financial statements commonly called in for-profit health care organizations and in not for-profit care organizations?

The following questions relate to the statement of operations of not for-profit health care organizations.
1. What is the analogous for-profit statement called? What are the main sections of the statement of operations?

2. What are revenues, gains, and other support?

3. What are expenses and losses?

4. Funds released from restricted net assets to unrestricted net assets are presented in what section of the statement of revenue, expenses and other activities?

The following questions relate to the statement of changes in net assets.
1. What is the traditional name for this statement?

2. What is the purpose of this statement?

3. What are the main sections of this statement?

4. Discuss the difference between permanently restricted and temporarily restricted net assets.

The following questions relate to the statement of cash flows of a not-profit health care organization.
1. What are its main sections?

2. What is the purpose of this statement?

3. Where in the financial statements would there be important explanatory information?

4. In what financial statement would one identify the purchase of long-term investments?

5. How does the accrual basis of accounting differ from the cash basis of accounting?
Part 2: Accrual vs. Cash Basis Accounting & Balance Sheet

Accrual vs. Cash Base Accounting
1. Explain the difference between the accrual basis of accounting and the cash basis of accounting. What are the major reasons for using accrual accounting?

2. What are the purpose of a journal and a ledger?
Give an example of a contra-asset, and explain how it is recorded on the ledger as a transaction.

3. Explain what a “prepaid expense” is and how it is recorded on the ledger as a transaction.

4. What are the major differences in recording transactions for a for-profit organization versus a not-for-profit, or are there any?

5. List and record each transaction for S. Zee Outpatient Clinic under the accrual basis of accounting at December 31, 20X1. then develop a balance sheet as of December 31, 20X1, and a statement of
operations for the year ended December 31, 20X1.
The clinic received a $3,000,000 of unrestricted cash contribution from the community. (this transaction increases the unrestricted net assets account.)

• The clinic purchased $2,000,000 of equipment. The clinic paid cash for the equipment.
• The clinic borrowed $1,000,000 from the bank a long-term basis,
• The clinic purchased $1,500,000 of supplies on credit.
• The clinic provided $5,500,000 services on credit.
• In the provision of these services, the clinic used $1,000,000 of supplies.
• The clinic received $500,000 in advance to care for capacitated patients.
• The clinic incurred $2,000,000 in labor expenses and paid cash for them.
• The clinic incurred $1,500,000 in general expenses and paid cash for them.
• The clinic received $4,500,000 form patients and their third parties in payment of outstanding accounts.
• The clinic met $300,000 of its obligation to capacitated patients in Transaction g.
• The clinic made a $100,000 cash payment on the long-term loan.
• The clinic also made a cash interest payment of $50,000.
• A donor made a temporarily restricted donation of $100,000 to be used for operations.
• The clinic recognized $200,000 in depreciation for the year.
• The clinic recognized $500,000 of patient accounts would not be received.

6. How do capital structure rations and liquidity rations differ in providing insight into an organization’s ability to pay debt obligations?

7. Identify and explain two situations where an organization might have increasing activity rations but declining profitability.
Part 3: The Working Capital Cycle and the Cost of Credit

Maximizing Revenue and Expenditures
Explain how the four kinds of float (billing, collections, transit and disbursement) can be used to maximize the efficiency of incoming revenues and outgoing expenditures? What kinds of policies
can be initiated to facilitate maximum efficiency and why?

The Working Capital Cycle and the Cost of Credit

1. In terms of cash flow, what are the stages of the working capital cycle?

2. Describe the two components of a working capital management strategy.

3. What are the two types of unsecured bank loans? Describe each.

4. In the hospital’s billing process, why is medical records a critical department?

5. Identify the alternatives for investing cash on a short-term basis, and discuss the general characteristics of each.

6. List three ways to measure accounts receivable performance.

7. Identify and define two methods to finance accounts receivable.

8. Compute the annual approximate interest cost of not taking a discount using the following scenarios. What conclusion can be drawn from the calculations?
• 2/10 net 20
• 2/10 net 30
• 2/10 net 40
• 2/10 net 50
• 2/10 net 60

9. On January 2, 20X1, City Hospital established a line of credit with First Union National Bank. The terms of the line of credit called for a $200,000 maximum loan with an interest of 11 percent.
Then compensating balance requirement is 15 percent of the total line of credit (with no additional fees charged).

10. What is the effective interest rate for City Hospital if 50 percent of the total amount were used during the year?

11. How would the answer to part of a change if the additional fees were $500?

12. How would the answer to part of a change if the additional fees were $1,000?

Part 4:

Rate of Return & Net Present Value
A. When using the IRR approaches, when can the internal rate of return be determined simply by dividing the initial outlay by the cash flows?
Will a decision that is based on NPV ever change if it were based on IRR instead?
Why or why not?

Certainty, Inflation & Opportunity Cost
B. Is it better to receive money today or money in the future? In your answer be sure to include the principles or certainty, inflation, and opportunity cost.
Investment Payback Calculation

1. What is the difference between simple interest and compound interest?

2. What is the future value of $10,000 with an interest rate of 16 percent and one annual period of compounding?
• With an annual interest rate of 16 percent and two semiannual periods of compounding?
• With an annual interest rate of 16 percent and four quarterly periods of compounding?

3. What is the relationship between the present value factor and future value factor?

4. Compare the results of the present value of a $6,000 ordinary annuity at 10 percent interest for 10 years with the present value of a $6,000 annuity due at 10 percent interest for 11 years.
Explain the difference.

5. If a nurse deposits $1,000 today in a bank account and the interests is compounded annually at 12 percent, what will be the value of this investment:
• Five years from now?
• Ten years from now?
• Fifteen years from now?
• Twenty years from now?

6. Comment of the following statement. “When a not-for-profit facility receives a contribution from a member of the community, the cost of capital is inconsequential when deciding how to use this
contribution, because it is, in effect, free money.”

7. What are the primary drawbacks of the payback method as a capital budgeting technique?

8. Explain why pro forma income statements adjust for depreciation expense when developing projected cash flows for a project.

9. Will a decision that is based upon NPV ever change if it were based upon IRR instead? Why or why not?

Part 5: Debt Financing and Financial Investment Analysis

Loan Amortization
Land Hope Hospital has hired you to advise them on a loan they need to take out. Prepare a list of questions you will need them to answer in order to prepare a amortization schedule.

Capitol Investment
A capital investment is expected to achieve long-term benefits for the organization.
These benefits generally fall into three categories.
Identify and discuss these categories.
Is there one category that seems to be more important than the others?
Are they independent or interdependent?

Break-even Analysis
Sure Care Health Maintenance Organization is seeking a managed care contract with a local manufacturing plant. Sure Care estimates that the cost of providing preventative and curative care for the
300 employees and their families will be $36,000 per month.
The manufacturing company offered Sure Care a premium bid of $200 per employee per month. If Sure Care accepts this bid and contracts with the manufacturing firm, will Sure Care earn a profit or
loss for the year? How much?
Describe the steps you used to solve this question.

Issuing Debt and Bond Valuation

1. What avenues are available for for-profit and not-for-profit health care providers to increase their equity position?

2. What are the advantages and disadvantages to a taxpaying entity in issuing debt as opposed to equity?

3. Explain the difference between subordinate debentures and debentures.

4. Why would an investment banker syndicate a bond issue with other investment bankers?

5. If a $1,000 zero coupon bond with a 20-year maturity has a market price of $311.80, what is its rate of return?

6. A tax-exempt bond was recently issued at an annual 8 percent coupon rate and matures 20 years from today. The par value of the bond is $1,000.

7. If a required market rates are 8 percent, what is the market price of the bond?

8. If required market rates fall to 5 percent, what is the market price of the bond?

9. Charles City Hospital plans on issuing a tax-exempt bond at the bond is $1,000.

10. If required market rates are 6 percent, what is the value of the bond?

11. If required market rates fall to 12 percent what is the value of the bond?

12. At what required market rate (3,6, or 12 percent) does the above bond sell at a discount? At a premium?

13. Mercy Medical Mega Center , a taxpaying entity, has made the decision to purchase a new laser surgical device. The device costs $400,000 and will be depreciated on straight-line basis over five
years to a zero salvage value. Mercy Medical could borrow the full amount at a 15 percent rate for five years. The after-tax cost of debt equals 9 percent. Alternatively, it could lease the device
for five years. The before-tax lease payments per year would be $80,000. The tax rate for this MegaCenter is 40 percent. From a financial perspective, should Mercy lease the surgical device or
borrow the money to purchase it and why?

Part 6: The Break-Even Equation and Profit Calculation

Minimizing Errors in Projections
Break even analysis utilizes both current and projected figures. In a rapidly changing economy, there are many individuals who are finding that their initial break even analyses were incorrect.
In your opinion, what could be done to minimize errors in projections?

Break-even Analysis
Sure Care Health Maintenance Organization is seeking a managed care contract with a local manufacturing plant.
Sure Care estimates that the cost of providing preventative and curative care for the 300 employees and their families will be $36,000 per month.
The manufacturing company offered Sure Care a premium bid of $200 per employee per month. If Sure Care accepts this bid and contracts with the manufacturing firm, will Sure Care earn a profit or
loss for the year? How much?
Describe the steps you used to solve this question

Break-Even Equation and Profit Calculation
1. What are the formulas for:
• The basis break-even equation
• The basis breakeven equation expanded to include indirect costs and desired profit?

2. Explain the relationship between step-five costs and the relevant range.

3. Based on the product margin, when is it in the best interests of an organization to continue or drop a service?

4. Laurie Vaden is a nurse practitioner with her own practice. She has developed contracts with several large employers to perform routine physical, fitness for duty exams, and initial screening of
on-the-job injuries. She currently sees 150 per month, charging 450 per visit. Her total costs are $7,500, of which $1,500 is for supplies. She has decided that she needs to increase profit, so she
is considering raising her fee to $65. She expects to lose 10 percent of her business to competitors that charge an average of 460 per visit. Determine her current and predicted: 1) revenues, 2)
variable costs, and 3) total contribution margin. What do you recommend she do? Why?

5. Janet Gilbert is director of labs. She has some extra capacity and has contracted with some small neighboring hospitals to run some of their lab tests. She has recently had a study conducted and
has determined that her costs of these contracts are $10,000 of which $7,000 are for supplies and items related to each test. She currently charges an average of $10,00 per lab test. She is
thinking of lowering her price by 20 percent in hopes of raising her current volume of 10,000 tests by 15 percent. Determine her current and predicted: 1) revenues, 2) variable costs, 3) total
contribution margin, and 4) net income. What do you recommend she do? Why?

6. Shady Rest Nursing Home has 100 private pay residents. The administrator is concerned about balancing the ratio its private pay to non-private pay patients. Non-private pay sources reimburse an
average of $100 per day whereas private pay residents pay average 100 percent of full daily charges. The administrator estimates that variable cost per resident per day is $25 for supplies, food,
and contracted services and annual fixed costs are $4,562,500.
• What is the daily contribution margin of each non-private pay resident?
• If 25 percent of the residents are non-private pay, what will shady Rest charge the private pay patients in order to break even?
• What if non-private pay payors cover 50 percent of the residents?

7. The owner of Shady Rest Nursing Home insists that the facility earn $80,000 in annual profits. How much must the administrator raise the per day charge for the privately insured residents if 25
percent of the residents are covered by non-private pay payors?

Part 7: ROI and Variance Analysis

Strategic Planning and Budgeting
Discuss the role of strategic planning in the budgeting process. How does it differ from short-term planning?What are the advantages and disadvantages of the participatory approach to budgeting?

How Far to Carry a Strategic Plan
The idea of strategic planning. Experts are torn on how far out to carry such a plan; some suggest 5 years, others suggest 3 years. Identify which length of time you believe to be more beneficial
to the organization and highlight the pros and cons of your decision.

ROI and Variance Analysis
1. What are the major components of the planning/control cycle?

2. What are the four major budgets of a health care organization? Briefly discuss each.

3. Describe the four types of responsibility centers, including the characteristics of each.

4. What are transfer prices? Discuss their major disadvantages.

5. Name two financial measures used to judge the performance of investment centers that are not used to measure the financial performance of profit centers.

6. What does the term “variance analysis mean when applied of financial performance of health care organizations?

7. A new cardiac catheterization lab was constructed at Havea Heart Hospital. The investment for the lab was $450,000 in equipment costs and $50,000 in renovation costs. A desired return on
investment is 12 percent. Once the lab was constructed, 5,000 patients were served in the first year and were charged $340, for each procedure. The annual fixed cost for the catheterization lab is
$1 million and the variable cost is $129 per procedure. What is the catheterization labs profit? Did this profit meet its desired ROI? Why or Why not?

Part 8: Cost, Pay and Profit Analysis

Cost Systems For Maximum Advantage
Any cost that a health care manager can authorize or directly influence is a controllable cost. Examples of non-controllable costs for the business include: taxes, interest, costs mandated in the
fulfillment of contracts, costs of having the buildings ADA accessible, costs associated with complying with all minimum standards for habitation and use of buildings, costs associated with
purchasing and maintaining every piece of equipment required for contracts, and costs associated with complying with mandated safety levels. Virtually every other expense the health care manager
can influence the amount of the expense by controlling the level of the activity.

1. Which costing system would be more efficient when direct materials and direct labor costs are high, and overhead costs are low and why?
2. Which costing system would be more efficient when direct labor costs and direct materials are low, and overhead is high and why?
3. Explain how the supply chain and the macroeconomic environment of the health care business fit in with your calculations?

Cost, Payment and Profit Analysis

1. Discuss the four major concerns of using the cost-to charge ration method.

2. What is the relationship between the concepts cost allocation basis as used in the step-down method and cost driver as used in ABC?

3. What is the difference between a cost object’s direct cost and its fully allocated cost? Give an example.

4. What are the advantages and disadvantages of ABC relative to the step-down method of cost allocation?

5. Name the units of service on which cost-based payers may pay providers.

6. How do copayments and deductibles reduce risk?

7. Why do providers desire “steerage”?

8. Who bears the risk under a flat is system? Why?

9. How do HMOs uses determine their premiums?

10. If an HMO covered 150,000 lives, expected 25 myocardial infarctions (MI) to occur each year within the covered lives, would expect a length of stay of 4.5 days for each MI, and had to pay an
average of $950 per day for each day the MI patient was in the hospital, what would the PMPM cost of the HMO be? What would have to be charged to the patient/employer if the HMO had administrative
costs equaling 10 percent of its costs and it wanted a profit margin of 7 percent?