HSA525 Assignment

• Chapter 13: Trend Analysis, Common Sizing,  and Forecasted Data
• Chapter 14: Using Comparative Data

The Following Assignments to be completed are Highlighted in yellow for each chapter and are as follows:

• Assignment Exercises 13-3 and 13-4 on pages 487 through 488
• Assignment Exercises 14-2, 14-3, and 14-4 on pages 489 through 490

CHAPTER 13

Example 13A: Common Sizing

Common sizing converts numbers to percentages so that comparative analysis can be performed. Reread the chapter text about common sizing and examine the percentages shown in Table 13–1.

Practice Exercise 13–I: Common Sizing

The worksheet below shows the assets of two hospitals.

Required

Perform common sizing for the assets of the two hospitals.

Same Year for Both Hospitals

Hospital A                     Hospital B

Current Assets     \$ 2,000,000                     \$ 8,000,000

Property,                  7,500,000                     30,000,000

Plant, & Equipment

Other Assets              500,000                        2,000,000

Total Assets              \$10,000,000                \$40,000,000

Assignment Exercise 13–1: Common Sizing

Refer to the Metropolis Health System (MHS) comparative financial statements contained in Appendix 28-A.

Required

Common size the MHS statement of revenue and expenses.

Example 13B: Trend Analysis

Trend analysis allows comparison of figures over time. Reread the chapter text about trend analysis and examine the difference columns shown in Table 13–3.

Practice Exercise 13–II: Trend Analysis

The worksheet below shows the assets of Hospital A over two years.

Required

Perform trend analysis for the assets of Hospital A.

Hospital A

Year 1                          Year 2

Current Assets                       \$1,600,000                  \$ 2,000,000

Property, Plant, & Equipment 6,000,000                   7,500,000

Other Assets                               400,000                 500,000

Total Assets                             \$8,000,000   \$10,000,000

Assignment Exercise 13–2: Trend Analysis

Refer to the Metropolis Health System (MHS) comparative financial statements contained in Appendix 28-A.

Required

Perform trend analysis on the MHS statement of revenue and expenses.

Practice Exercise 13–III: Contractual Allowance

Assumptions:

1. Your unit’s gross charges for the period to date amount to \$200,000.
2. The uniform gross charge for each procedure in your unit is \$100.
3. The unit receives revenue from four major payers. For purposes of this exercise, assume the revenue volume from each represents 25% of the total. (The equal proportion is unrealistic, but serves the purpose for this exercise.)
4. The following contractual payment arrangements are in effect for the current period. The percentage of the gross charge that is currently paid by each payer is as follows:

Payer 1 = 90%

Payer 2 = 80%

Payer 3 = 70%

Payer 4 = 50%

Q:     How many procedures has your unit recorded for the period to date?

Q:     Of these, how many procedures are attributed to each payer?

Q:     How much is the net revenue per procedure for each payer, and how much is the contractual allowance per procedure for each payer?

Assignment Exercise 13–3

As a follow-up to the previous Practice Exercise, new assumptions are as follows:

1. Your unit’s gross charges for the period to date amount to \$200,000.
2. The uniform gross charge for each procedure in your unit is \$100.
3. The unit receives revenue from four major payers. The number of procedures performed for the period totals 2,000. Of that total, the number of procedures per payer (stated as a percentage) is as follows:

Payer 1 = 30%

Payer 2 = 40%

Payer 3 = 20%

Payer 4 = 10%

1. The following contractual payment arrangements are in effect for the current period. The percentage of the gross charge that is currently paid by each payer is as follows:

Payer 1 = 80% [Medicare]

Payer 2 = 70% [Commercial managed care plans]

Payer 3 = 50% [Medicaid]

Payer 4 = 90% [Self-pay]

Q:        How many procedures are attributed to each payer?

Q:        How much is the net revenue per procedure for each payer, and how much is the contractual allowance per procedure for each payer?

Q:        How much is the total net revenue for each payer, and how much is the total contractual allowance for each payer?

Assignment Exercise 13–4.1: Forecast Capacity Levels

Review the information in Exhibit 13–1. The exhibit assumes three chairs and one 40-hour RN, for a realistic capacity level of seven patients infused per day.

Required

Prepare another Infusion Center Capacity Level Forecast as follows:

Assume the same three infusion chairs, but add another nurse for either four or six hours per day. How would this change the daily capacity level for number of patients infused per day?

Assignment Exercise 13–4.2

Required

Prepare another Infusion Center Capacity Level Forecast as follows:

Increase the number of infusion chairs to four, and add another nurse for either four or six hours per day. How would this change the daily capacity level for number of patients infused per day?

CHAPTER 14

Assignment Exercise 14–1: Comparable Data in a Graph

Review Figures 14–1 through 14–5. Each of the five figures presents a graph depicting some type of comparative data.

Required

Locate healthcare information that can reasonably be compared. (1) Prepare your comparative data. (2) Using your data, create one or more graphs similar to those found in Figures 14–1 through 14–5.

Assignment Exercise 14–2: Cumulative Inflation Factor for Comparable Data

Review Table 14–3 and the accompanying text.

Assumptions

Two hospitals report their annual projected revenue for five years to the local newspaper for a story on the area’s future economic outlook. However, Hospital 1 has applied a cumulative inflation factor of 5% per year while Hospital 2 has not applied any inflation factor. Thus the information is not properly comparable.

Projected Revenue

Required

Revise Hospital 2’s projections by applying a cumulative inflation factor of 5% per year.

Assignment Exercise 14–3

The head of your department is a prominent researcher. A health research foundation has asked him travel to London to give an important speech at a conference. He will then travel to Paris to tour a research facility before returning home. Although his travel expenses are being funded by the foundation, he will still need to take along some personal money. Consequently, he asks you to figure the exchange rates for \$500 and for \$1,000 in both pounds and euros. He explains that he is trying to judge the spending power of U.S. dollars when converted to the other currencies so he can decide how much personal money to take on the trip.

Required

Locate the current exchange rates for pounds and euros and compute the currency conversion for \$500 and for \$1,000.

Assignment Exercise 14–4: The Discovery

The Chief Financial Officer at Sample General Hospital has just discovered that the hospital’s Chief of the Medical Staff’s son Jason, a student at the local community college, is paid \$100 per week year-round for grounds maintenance at the hospital’s Outpatient Center.

The CFO, no fan of the Chief of Medical Staff, now wants you to prepare a report that compares the relative costs of lawn care at each of three locations: the hospital itself, the outpatient center, and the hospital-affiliated nursing home down the block.

Required

Review the available information for grounds maintenance at the three facilities. Decide how to convert this information into comparable data. Then prepare a report, based on your assumptions, that presents comparable costs of grounds care. Also provide your assessment of what the best future course of action should be.

Relevant Information

So far you have assembled the following information. Now you need to decide how it can be converted into comparable data.

Introduction to the Three Facilities

Sample General Hospital is an older 100-bed hospital. The new Outpatient Center, built last year, is across the street and the Golden Age Nursing Facility is down one block, on the corner. All three facilities are part of the Metropolis Health System. (Appendix 28-A contains some financial details about Sample Hospital.) The hospital is located in the midwesternsunbelt; there is occasional frost in the winter but no snow.

Grounds Maintenance Tasks That Should Be Performed at All Three Sites

• Mowing and edging
• Walk sweeping
• Raking leaves
• Blowing off parking lot
• Flower bed maintenance (where necessary)
• Hedge trimming and minor tree pruning (major tree trimming is performed by a contractor on an as-needed basis and thus should be disregarded)

Figure Ex-1 provides a map that illustrates the layout of the grounds for each facility and their proximity to each other.

Figure Ex–1   Sample Hospital Map.

Grounds Maintenance Arrangements for the Three Facilities

The current grounds maintenance arrangements vary among the three facilities as follows:

1. Sample General Hospital uses its Maintenance department employees for grounds care. The hospital pays these employees \$15 per hour plus 15% employee benefits; it is estimated they spend 1,000 hours per year on grounds maintenance work. Another estimated 120 hours per year are spent on maintaining the lawn care equipment. The employees use a riding lawn mower, edger, and blower, all owned by the hospital. The hospital just bought a new mower for \$2,995 less a 10% discount. It is expected that the mower should last for five years.
2. The hospital’s Chief of the Medical Staff’s son Jason, a student at the local community college, is paid \$100 per week year-round for grounds maintenance at the hospital’s Outpatient Center. A friend sometimes helps, but when that happens Jason pays him out of his weekly \$100. It takes about 1.5 hours to mow, edge, and blow. Jason uses his dad’s riding mower and blower, but Jason recently bought his own edger. Jason also buys fertilizer for the grass twice a year.
3. The Nursing Facility contracts with a landscape service on a seasonally adjusted sliding scale. The landscape service is paid \$600 per month from April to October (mowing season); \$400 per month for February, March, and November; and \$200 per month for November, December, and January. The landscape service provides all their own equipment. They also provide fertilizer and provide annuals to plant in the flower beds every quarter.

Sample General Hospital Property Description

The grounds to be maintained are as follows:

• The front lawn is grass in two sections on either side of the front entrance. Each section is about 50′ by 60′.
• There is a hedge along the front of the building that is about 50′ on either side of the front entrance.
• There are two small matching flower beds on either side of the front entrance.
• Another strip of grass alongside of the building is 30′ by 100′.
• A third small strip of grass about 5′ by 25′ is by the Emergency entrance.
• The walkway dimensions are as follows: about 50′ of front walk; about 30′ of staff entrance walk, both of which are 5′ wide.
• The Emergency Department’s paved patient drop-off area is about 25′ by 30′.
• The parking lot surface is about 200′ by 250′. Along one side are overhanging trees that drop leaves and debris and are a constant sweeping problem. These are the only trees on the hospital site.

Outpatient Center Property Description

The grounds to be maintained are as follows:

• There is a strip of grass at the front of the building that is 12′ wide and 65′ long, split in the middle by a walkway 5′ wide.
• There is a strip of grass at the back of the building between the building and the parking lot that is 5′ wide and 50′ long
• All the rest of the property is paved.

Nursing Center Property Description

Golden Age Nursing Center occupies one whole block. The grounds have many large trees. Flowerbeds have been planted around the trees as well as along the front walk and entrance. There are also two secured patio areas at the side of the building, screened by hedges, and each has a small bed of annuals. Because of the unique design of the building, grounds maintenance requires considerable handwork such as edging with a

(Baker 486-492)

Baker, Judith J. Health Care Finance, 4th Edition. Jones & Bartlett Learning, 08/2013. VitalBook file.

The citation provided is a guideline. Please check each citation for accuracy before use.

APPENDIX 28-A    Metropolis Health System’s Financial Statements and Excerpts from Notes

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

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

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:

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.

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 services 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.

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 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.

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.

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:

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:

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

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:

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.

(Baker 405)

Baker, Judith J. Health Care Finance, 4th Edition. Jones & Bartlett Learning, 08/2013. VitalBook file.

The citation provided is a guideline. Please check each citation for accuracy before use.

APPENDIX 28-B    Comparative Analysis Using Financial Ratios and Benchmarking Helps Turn Around a Hospital in the Metropolis Health System

Sample General Hospital is another facility within the Metropolis Health System. Sample General Hospital has recently been acquired by Metropolis. It is a 100-bed hospital that has been losing money steadily over the last several years. The new chief financial officer (CFO) has decided to use benchmarking as an aid to turn around Sample’s financial situation. Benchmarking will illustrate where the hospital stands in relationship to its peer group.

The CFO orders two benchmarking reports: one for the hospitals that are 100 beds or less and one for all hospitals, no matter the size. The 100-beds-or-less report will allow direct comparability for Sample, while the all-hospital report will give a universal or overall view of Sample’s standing. Both reports appear at the end of this case study. Exhibit 28-B–1 is the benchmark data report for Sample General Hospital compared with hospitals less than 100 beds, whereas Exhibit 28-B–2 is the benchmark data report for Sample General Hospital compared with all hospitals.

When the reports arrive, the CFO writes a description of how the data are arranged so that his managers will better understand the information presented. His description includes the following points:

1. The percentile rankings are intended to present the hospital’s performance ranked against all other performers in the comparison group. Whether the hospital’s actual performance is good or bad depends on the statistic being evaluated.
2. The first column, labeled “Annual Average Year 1,” provides a historical trend of actual performance of the hospital in the previous year. It is provided for reference only so that the reader can see the trend over time.
3. The column labeled “Q1 Year 2” represents the first quarter of the current year. These are the most recent data that this service has been provided for Sample General Hospital and are the data used in the comparison columns that follow.
4. The column labeled “50th %ile” represents the 50th percentile of all of the hospitals in the comparison group that supplied data for the individual line item.
5. The “Variance” column compares the data from Q1 Year 2 of Sample General Hospital with the 50th percentile information from the entire comparison group.
6. The column labeled “%ile Range” indicates where Sample General Hospital’s individual score fell within a percentile range.

For example, review the average length of stay information for hospitals less than 100 beds in Exhibit 28-B–1. For the Q1 Year 2, Sample General Hospital has a length of stay of 3.91 versus a benchmark comparison number of 4.06, a favorable performance against the 50th percentile by 0.15 (the –0.15 indicates an amount under the 50th percentile that, in the case of average length of stay, would be favorable). This performance places the hospital’s score in the 35th to 40th percentile of all respondents.

As the CFO already knows, Sample General Hospital is in trouble. In most cases, the facility is either at or below (worse than) the 50th percentile information. Most of the labor productivity measures are in the 60th to 65th percentile range, with the cost information in the same relative range. This indicates that Sample is spending more than the peer group for labor and supplies. The utilization statistics also present a dismal picture.

Each statistic has to be evaluated against what it means to the institution before a conclusion can be drawn. For example, the occupancy percentage for Sample is 46.36% versus the 50th percentile of 57.66%. This places Sample in the 10th to 15th percentile range for the comparison group of hospitals less than 100 beds. In terms of utilization, the CFO knows that a facility should be in the 80th to 85th percentile range to use all of its assets effectively.

What other statistics should the CFO review to assure that a higher occupancy percentage is beneficial to the hospital? The answer is average length of stay. Sample General Hospital has a length of stay of 3.91 (as discussed earlier), which is favorable compared with the peer group, but an occupancy rate that is 11.30% below the 50th percentile for the peer group of hospitals less than 100 beds. If these two statistics are observed in combination, one could say that Sample efficiently manages its patients, but just does not have enough of them.

Other statistics bear the same message. The hospital is not profitable, and much of the problem is because the cost of running the institution exceeds the availability of patients to pay the bills. In other words, all institutions have core staffing requirements, and within a certain range of volume, most costs are fixed. Sample has 100 beds in use while the 50th percentile for its peer group shows 66 beds in use. Sample’s plant is too big for its patient volume. These circumstances can mean the hospital is heading for disaster.

So what happened to Sample General Hospital? As you can surmise from the data, the previous year (labeled “Year 1” on Exhibits 28-B–1 and 28-B–2) was not favorable. Three years previous, the institution was losing money at a rate of over \$1 million per month. The next two years showed improvement (even though the data still show concern), and the improvement trend continued through the year labeled “Year 2” on Exhibits 28-B–1 and 28-B–2. By using benchmarking data (and a lot of other analysis), management was able to determine and address many issues that forced this facility to perform below market averages. By improving quality, managing costs, and controlling productivity, the hospital was able to stabilize its financial position. In addition, with creative management and attention to both clinical quality and customer service, the occupancy percentage rose to above the 50th percentile. Finally, the operating margin improved dramatically. In the first quarter of year 2, the margin was minus 3.18. By the end of year 3, results showed a positive margin of greater than 2.5%, a dramatic turnaround. Benchmarking assisted in this turnaround by showing management where the need for improvement was greatest.

(Baker 421)

Baker, Judith J. Health Care Finance, 4th Edition. Jones & Bartlett Learning, 08/2013. VitalBook file.

The citation provided is a guideline. Please check each citation for accuracy before use.

(Baker 419-420)

Baker, Judith J. Health Care Finance, 4th Edition. Jones & Bartlett Learning, 08/2013. VitalBook file.

The citation provided is a guideline. Please check each citation for accuracy before use.

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