Case Analysis :Riverview Community Hospital (RCH)
Riverview Community Hospital (RCH) is a hospital that of for non profit. It operates in an area that it competes with three other main hospitals. The present financial standing of the hospital and benefits of being fully accredited by the joint commission are not adequate enough to conquer the economic challenge. It ought to improve its stability in finances so as to remain efficiently operational. It should offer a varied services to those who it serves.
Table of contents
Executive summary. 1
Table of contents. 2
Overview OF Riverview Community Hospital 4
Riverview Community Hospital Analysis. 6
Financial indicators analysis. 6
Operating indicators analysis. 12
Findings summary. 13
Volume of patients. 17
Accounts receivable. 18
Other recommendations. 19
Financial KPIs. 19
Operating KPIs. 21
Appendix: Tables. 23
Though Riverview has been improving its patients’ health, it has been struggling to triumph over the fiscal pressures from its competitors along with the economy.
The internal challenges are mainly attributed to the annual net income. Maintenance of the volume of patients is essential to produce adequate revenue for covering all the expenses. This comprises of both inpatient and outpatient visits. It is not easy to establish the paramount means of reducing costs and expenses while still offering high quality care and being able to get employees in full time basis. This is very tricky since there are other not for profit hospitals and a large for profit hospital within the same locality. Since these hospitals compete for similar patients, it decreases the chances of
The matter is further complicated by reason that 2009 was marked by the introduction of various changes to the form of IRS 990. This is the form that all for profit organizations ought to fill so as justify exemptions from tax. Lastly, the financial turmoil from during the period of 2008 -2009 mostly probably affects the financial stability of
Increase in unemployment level resulting from recession may cause many of the patients of
Financial indicators analysis
The DuPont analysis offers a guide for comprehending the return on equity (ROE) for the hospital. By use of this analysis one can understand the return on equity of
First, the determiner for profit margin is the ratio of income to the total revenue expenses. From this ratio one can better understand, the total revenues percentage, both operating and non-operating, converted into net income. In the presence financial year, the profit margin is seen as 6.75%. This value is more than the 3 to 5 percent national average. However, it is essential for the
Starting with 2005, there is a 11.38% of profit margin; nonetheless, currently there is a 6.75% profit margin. This shows a decrease of 4.63%. There is also a notably observable decrease from 2006 to 2007 as well as from 2007 to 2008. First in the period between 2006 and 2007, the hospital was faced with a decrease of 2.53% in profit margin, that is, from 11.28 to 8.75%). Additionally it saw a decrease of 2.27% decrease in the profit margin, that is, from 8.75 to 6.48%.
Evaluation of the component of profitability of return on equity shows that the hospital has faced an increase in the total revenue every year. The operating revenue is also following a similar trend. The non operating revenue shows fluctuations, despite the fact that the non operating budget has shown an increase from 1.305 to 1.834 million over the period of five years. However, it is seen that the net income has decreased from 3.070 million to 2.458 million with a sharper decreases been seen in 2006 to 2007 and 2007 to 2008. This observation may be because of increase in some expenses in the stated years. For instance, from 2006 to 2007,
Second, analysis of the operating efficiency allowed the use of allowed the use of total asset turnover ratio for the determination of the way
The total asset turnover ratio shows fluctuations all through the period of five years. It experienced a sharp decrease of 2.15% in the period between 2005 and 2006. It went on decreasing steadily from 2006 to 2007, again it decreased from 2007 to 2008; the value was 4.43%. Lastly,
To improve the total asset turnover, the total revenues ought to outpace the acquisition of assets. This can be seen in 2009 when the growth rate for the total assets and the total revenue each has an approximate of 2 million annually. However, there was also an increase of 4million with a similar trend of a 2 million net asset increase. This revenue increase produced more total asset turnover ratio (Merican, 2012).
The equity multiplier and financial leverage show how much debt that can be used for acquiring of extra assets. This ratio can be determined one by the equity financing ratio that is, net assets divided by the total assets. Just like the total asset turnover ratio, the is also a fluctuation in the equity multiplier. The equity multiplier of
Finally, determining the product of the product margin, the total asset turnover, and the equity multiplier leads to a return on equity. Despite there been fluctuations in the rate of asset turnover and the equity multiplier,
Being familiar with the organization’s profitability allows the institution to know the ability of the hospital to generate income. Together with the profit margin, as shown in the DuPont analysis, it is also viable to consider the return on assets. Through such an indicator, one can see the earned net income for every dollar invested in assets. For instance, in 2005 7.75% return on assets, basically equated to $0.775 in the profits resulting form every dollar invested in total assets. As the return on equity increases, it can be assumed that the assets are being used productively. Unluckily, there was a decrease in the return on assets throughout the period of five years.
The return on assets decreases results from the decrease in net income and the increase in the total assets. An in-depth analysis using net income, it should be known that the decrease results from both revenues and expenses that increases at high rates.
The cash on for the day indicates the number of days
Among the reasons for this could be due to the fact that the days in accounts receivable is very high, in comparison to the national average of 45 to 55 days. This implies that on average it takes about two months to collect receivables after the provision of services. From the period between 2005 and 2007, one sees a considerable decrease that approaches the national average. However, for the past two years, it has been seen to flow again. Interestingly, there is an inverse association amid the days’ cash on hand and days in accounts receivable after comparing the two graphs. This could be attributed to long length of time taken in converting the receivables into cash (Cohen, Thiraios & Kandilorou, 2008).
The fixed asset turnover (FAT), which is calculated by dividing of the total revenue by the net assets, measures the efficiency of hospital in its investment of the fixed assets. Specifically, it measures the amount of revenue each dollar generates of the net fixed assets. In Comparison of the average of two dollars for every dollar spent on the net fixed assets, Riverview Community is performing poorly because its ratio is below 1 for the past five years.
Considering the cash flow statement,
In supplementing the capital structure understanding, the time interest earned ratio (TIE) should be looked into. It is the proportion of earnings available for paying every dollar of expense for interest. For the majority of hospitals, the expense of interest is met by the current accounting income by a 2 to 3 multiple. The turning point for the
The debt coverage service of
Operating indicators analysis
After observing the patients of
When observing the operating indicators of volume, it is found that over time, the amount of inpatient volume, the inpatient days, and the average daily census has gone down since 2005. This change in volume can be attributed to competition increase in the community. It can also be attributed to increase in the services of outpatient since the sum of outpatient visits, since 2005, has gone up. This reflects the decision by the board in 2004, to increase the services of outpatients to evade losing patients to other healthcare facilities, who had started providing traditional inpatient procedures in an outpatient setting.
Despite the change in the volume of inpatients, the rate of occupancy and the average length of stay have not changed though there are minor fluctuations for the past five years. The average length of stay has remained under the average of industry that shows excellence in clinical management and utilization as resources are being used effectively. In addition the patient risk has gone down with the decrease in the average length of stay.
Price cost and profitability
Additional analysis of operating indicators of RCH comprises of price, cost and profitability of the facility. With the increased healthcare cost, it is not surprising to see that the inpatient cost of admission and the visit by outpatient are on an increase. Together with these changes, there is an increase in the price of both visits by inpatient and outpatient admission. Luckily, RCH has been able to get increased profit because of low contractual adjustments. The current contractual allowance of RCH is 16.65.
Regardless of this increase over time, RCH has remained notably lower than the industry average of about 50%. This shows that RCH loses a limited patient revenue amount due to discounts and allowances.
After analysis of various operating and financial indicators, one can determine the strengths and weaknesses of RCH. Despite flourishing in various areas like inpatient profitability and clinical expertise, there is room for improvement in maintaining of the general fiscal stability.
In accordance to high equity financial ratio, RCH is in an appropriate position of borrowing money if indispensable. The general capital cost is 10%, which indicates that RCH can borrow funds at a 10% rate of interest. Having a higher equity financing ratio also positively affects the bond rating because RCH is not highly leveraged.
On the side of operations, there are various strengths that can be determined by an analysis of operating indicators. These strengths include performance of high quality. As stated previously, RCH has a relatively low average length of stay and consistently below the average length of stay of 5.4 days. Short average length of stay is a key indicator of clinical management since it is predictive of patient risk. In addition, it has been reported that RCH has a complete accreditation certificate from the joint commission hence it maintains a high score of patient satisfaction (Nissim & Penman, 2001).
From the operational and financial indicators analysis, there are various observable weaknesses in RCH. The main weakness for RCH is the payer mix; it features heavily in government programs. Between 2007 and 2008, majority of the fiscal indicators like the days in accounts receivable, days cash on hand and debt service storage that all went from trends that are commonly favorable to negative ones. This could result to Medicaid, Medicare and SCHIP Extension Act of 2007; whereby most patients were had government sponsored insurance. This is shown in the contractual allowances severe increase from $1.728 to 5.197 million in the period between 2007 and 2008. These indicate considerable deductions in revenue.
One of the weaknesses in cash flow in RCH is that it has a low day’s cash on hand and high days in accounts receivable. The general investments and cash decreased considerably from 2008 to 2009; it fell from $5 million to less than $2.9 million. This was due to both internal and external factors. Internally, RCH made considerable loan repayments which was totaling to $1.428. This led to low liquidity with less resources for the hospital to cover its expenses. On the external factors, the financial crisis affected their investments, which had $4.327 million net cash out flow.
Another weakness of RCH is the decrease in the volume of inpatients. As stated previously, the value of inpatient ought to be maintained since there are higher economies of scale and fixed costs are spread for high patient number. The volume of inpatient is essential to profitability. With inpatient services earning more than 80% of the patients’ gross revenue, the amount has been decreasing most likely because of decrease in the volume of inpatient. This decreased in the average daily census and admissions of inpatient can be ascribed to the compensation within the region, along with the shift of certain procedures from a setting of inpatient to outpatient.
It can be noted that an extra weakness of RCH is the outpatient services. While there was an increase in outpatient services in RCH to remain competitive and meet the demands, these services have not been very profitable. As a matter of fact, after considering the operating indicators, RCH lose some funds for every service of outpatient. This revenue loss has remained high over the past years. For RCH to increase its profitability, it ought to consider modifying some of its weakest links. This will specifically be the outpatient services (Sundararajan et al 2002).
Of the RCH’s weakness that has been identified is the low level of profit. There are various steps that to be taken by administrators to help increase profits for patient revenue. This can be attained if there is a specific focus on the services of outpatient.
The initial step for improving profitability is decreasing costs. With decreasing admissions in inpatient volume and the decrease in the visits of unprofitable outpatients, RCH can try to increase profit level by reducing expenses. This can be done in various ways which include services reduction and encourage more effective use of resources. Resources can be used more effectively by employees; they should be keen on overuse of under use of medical supplies and equipment. In addition, use of process improvement methods like Lean six sigma can help in decreasing waste and a general decrease in operational cost. Through analysis of services and expenses for every aspect, RCH may as well consider reducing some of the services of outpatient offered to patients.
Another means for increasing profitability of RCH is the increase of revenue. This may be a more grueling duty for the administrators due to external factors may be limiting to the advancement, for instance, competition between health facilities. A suggestion to increase revenue is by the increase of volume of patients, specifically for inpatients that have shown to be more profitable. Another option that is even more risky for the increase of revenue is the price increase. Due to market competition, RCH may be a price taker, which may not be an appropriate alternative (Prieto, 2006).
Volume of patients
As stated previously, it is essential to increase the volume of patients so as to finance everyday operations adequately. This is because the volume of patients has a great effect on income. The hospital should increase the volume of patients so as to strategically market and promote high satisfaction of patients together with clinical quality. The hospital can increase the market share in the area that has a cautiously devised strategic plan that will attract patients. Because RCH possesses a low average length of stay as compared to the industry standards, the hospital can increase admissions. A higher rate of occupancy will generate revenue from many offered services.
Some other weakness that was identified is the cash flow within the
Looking keenly at the revenue cycle, proper documentation can reduce error chances in the diagnostic coding and medical bills. These errors affect the cycle of revenue, which create an effect of snowball. This not only affects the department of finance, but also other departments of patient service. For instance, it will be taking longer than the 30 days average for Medicare to fund the hospital if there are verifications and adjustments to be done. The average days in accounts receivable will also be affected. A committee or team can be put in place for monitoring the advancement and effectiveness of suitable documentation. This will help in ensuring that the standards set at the moment are not compromised (Prieto, 2006).
These modifications will enable the
Adding on to suggestions made previously, there are various minor modifications that can be recommended that will generally help the organization’s success. One of the suggestions is soliciting more donations by promotion of tax advantage to donors. Increasing the level of donations will assist in covering expenses and generally help in increasing the bottom line. As stated earlier, improving the payer mix may as well help the hospital. Without only considering the structures of reimbursement and payers, the hospital can promote the utilization of services if need be (Nissim & Penman, 2001).
After the implementation of the suggested recommendations, RCH ought to ensure the modifications are upheld all though the hospital. In addition, the top management ought to evaluate the organization in accordance to various key performance indicators to establish the recommendations effectiveness and ensure the intended results have been attained.
Days cash on hand
The days cash on hand usually measure the days the organization was able to fulfill the obligations of daily cash without new cash resources been availed. This is a great key performance indicator because it demonstrates the buffer in cash that can assist the hospital to remain liquid even in economic conditions that are tough. In a tough economic condition, as it is the situation currently, this measure is remarkable to the creditors, top management as well as the board of directors. High values of day’s cash indicate a higher liquidity and by creditors perceived them positively. Therefore, trying hard to have high days on cash value could be necessary to a hospital that borrows more, if need be, at a rate that is favorable during this time of economy. The industry ranges from about 30 to 45; however, due to its value there is a need to increase days in cash on hand to a portion that is high (Nissim & Penman, 2001).
Days in accounts receivable
The days in accounts receivable is an essential indicator for monitoring since it indicates the amount of time taken for bill collection. Preferably, it ought to be low so that RCH can use the money for paying back loans for reduction of interest expense or invest it. The hospital may also probably benefit from sales discount if they have the capacity of paying back suppliers within a specified period. Therefore, there is an opportunity cost for having the assets tied up in accounts receivable for a long time periods. This amount should meet the averages of the industry and reduce to between 40 and 55 days.
Equity financing ratio
The debt service ratio usually measures the ability of RCH to repay its loans. Traditionally, the hospital has been on creditworthiness upper bound. However, since 2007 this has been on a decrease. Though this is not alarming, since the hospital possess a good equity financing ratio, it ought to be monitored to guarantee the solvency of the hospital.
Return on equity
The return on equity ratio enables RCH to determine the amount of net income generated in relation to the net assets of the hospital. This is a strong indicator for it comprises an activity indicator (total asset turnover), profitability indicator (total margin), and capital structure (equity financing ratio). Considering all these factors, the ROE will enable main stakeholders to establish the profitability of the hospital. Determining the profitability via this indicator well could give the hospital a competitive edge as ROE shows whether the hospital earns profit with the hospital’s present equity. This value is expected to be greater than the industry average of roughly 8% (Sundararajan et al 2002).
Profit per patient visit
Among the notable weakness of RCH, is the lack of outpatient services profitability. Though the hospital is expanding and maintaining their services to maintain competitiveness, the outpatient services have been costing RCH a lot of money annually. By 2009, the hospital was losing about 200.00 per visit. Among the goals for RCH to be maintained is the reduction of loss by increasing revenue or decreasing expenses and the general intend of providing service that is profitable and that which does not lead to any loss.
One of the benchmark KPI is the occupancy rate. Just like the average daily service, the RCH would like the value to be very high. Higher rate of occupancy is better as a high number of inpatient services the revenue will also be high. The increase experienced between 2008 and 2009 can be ascribed to reduction in the number of stuffed beds, but not volume increase. The hospital can resort to using their present resources more effectively or augment the volume. At present, the occupancy rate of the hospital is in the mid to upper quartile of the size of the hospital; hence the hospital should increase the rate of occupancy and move into the upper quartile.
Another hospital’s goal to aim at is decreasing of the contractual allowance percentage. This usually measures the lost revenue amount due to allowance and discounts. This amount has decreased in the recent years. To capitalize on profits and revenues RCH ought to try to reduce the percentage of contractual allowance by probably improving contracts payer mix or renegotiating them. At present the percentage of contractual allowance is 16.56%, this value is in the lower to mid-quartile. The hospital can try to move into the lower quartile and decrease this value to less than 12% (Swamy, 2009).
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