HCM 400 Module 2 Financial Statements Short Paper Example

What Pine Hollow's Statements Say: A Plain-Language Reading

[Student Name]

Southern New Hampshire University

HCM 400: Healthcare Finance

Module Two Short Paper

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

What Pine Hollow's Statements Say: A Plain-Language Reading

Pine Hollow Memorial Hospital's board receives audited financial statements every year, but several members say they skip to the last line. This paper walks through the three main statements in plain language, explains what each line means for a small rural hospital and calculates a few basic measures that show where the hospital stands.

The Three Statements

The income statement, sometimes called the statement of operations, shows revenue and expenses over a year. The balance sheet shows what the hospital owns and owes at a single point in time. The statement of cash flows shows how cash moved in and out during the year through operations, investments and financing. Together they answer three questions: did the hospital earn more than it spent, what is it worth and does it have enough cash?

Operating Revenue

Net patient service revenue was $35.2 million, the amount the hospital expects to collect after contractual adjustments with insurers and charity care, not the much larger total of its charges. Other operating revenue of $2.8 million came from the cafeteria, a retail pharmacy and grants tied to operations. Total operating revenue was $38.0 million.

Operating Expenses

Operating expenses totaled $38.9 million. Salaries and benefits were the largest category at $22.4 million, followed by purchased services, including contracted emergency physicians and traveling nurses, at $5.1 million, supplies at $4.6 million, depreciation at $2.2 million, interest at $0.4 million and other expenses at $4.2 million. Depreciation spreads the cost of buildings and equipment over their useful lives; it lowers reported income, yet no money leaves the bank for it this year.

Operating Result

Operating revenue minus operating expenses produced an operating loss of $0.9 million. The operating margin, the loss divided by operating revenue, was minus 2.4%. This is the most important line for judging whether the hospital's core services pay for themselves, and for three years it has been negative.

Table 1. Condensed Statement of Operations

Note. Composite figures, rounded.

Nonoperating Items and the Bottom Line

Below the operating line, the hospital received $1.1 million from a county property tax levy that residents approved to support the hospital and $0.3 million in investment income. These nonoperating gains turned the operating loss into a $0.5 million excess of revenue over expenses. Board members who read only the last line see a small surplus; those who read the operating line see a hospital whose services lose money and that depends on taxpayers to break even.

The Balance Sheet: Assets

Current assets, which should turn into cash inside twelve months, totaled $12.1 million, including $4.8 million in cash and short-term investments and $5.9 million in patient accounts receivable, amounts owed by insurers and patients. Property, plant and equipment were recorded at $41.6 million in original cost, less $28.6 million in accumulated depreciation, for a net value of $13.0 million.

The Balance Sheet: Liabilities and Net Assets

Current liabilities, due within a year, totaled $7.6 million, covering unpaid supplier bills, wages owed and loan payments due this year. Long-term debt, mainly a loan used to renovate the emergency department, was $6.2 million. Net assets, what remains after liabilities are subtracted from assets, were $14.8 million. For a nonprofit hospital, net assets play the role that shareholders' equity plays in a business.

The Statement of Cash Flows

Operating activities generated $1.9 million in cash, more than the operating loss suggests, because depreciation reduced income without using cash. The hospital spent $2.6 million on equipment and building improvements and repaid $0.7 million of debt. With the tax levy and investment income, cash fell by $0.4 million over the year. Spending more on equipment than operations generate cannot continue indefinitely.

Notes to the Statements

Audited statements come with notes that explain accounting choices and risks, and they often contain the most useful information. Pine Hollow's notes show that about 52% of patient revenue comes from Medicare, 18% from Medicaid, 24% from commercial insurers and 6% from self-pay patients. They disclose that charity care at cost was $0.8 million, that the hospital must maintain 30 days of cash under its loan agreement and that Medicare settlements from prior cost reports are still being finalized. A reader who skips the notes misses the payer mix, the loan requirement and a possible adjustment to revenue.

Three Basic Measures

Pink et al. (2006) developed financial indicators for critical access hospitals so that these small hospitals could compare themselves with peers. Three simple measures from Pine Hollow's statements show its position. Days cash on hand, cash divided by daily cash operating expenses, is $4.8 million divided by about $100,500 a day, or about 48 days. Days in accounts receivable, receivables divided by daily net patient revenue, is $5.9 million divided by about $96,400, or about 61 days. The operating margin is minus 2.4%.

Why These Numbers Matter

Ly et al. (2011) reported that the weakest-margin hospitals in their national sample were considerably more likely to close or change operating status in the following years, and had somewhat worse quality on some measures. Holmes and Pink (2012) surveyed critical access hospital leaders about financial improvement strategies and found that many had adopted steps such as improving billing and collections and reviewing staffing, with leaders rating revenue cycle improvements among the most effective. Pine Hollow's slow collections and small cash reserve suggest similar opportunities.

What the Board Should Take Away

Three points stand out. The hospital's services lose money, and the tax levy masks the loss. Cash is thin, at about seven weeks of expenses. And collections are slow, tying up cash that the hospital needs. Future modules will compare these figures with peers and examine how the hospital is paid.

Conclusion

Reading the statements line by line reveals a hospital whose bottom line looks healthier than its operations, with limited cash and slow collections. Understanding each statement helps board members and managers ask the right questions before problems become crises.

References

Holmes, G. M., & Pink, G. H. (2012). Adoption and perceived effectiveness of financial improvement strategies in critical access hospitals. The Journal of Rural Health, 28(1), 92-100. https://doi.org/10.1111/j.1748-0361.2011.00368.x

Ly, D. P., Jha, A. K., & Epstein, A. M. (2011). The association between hospital margins, quality of care, and closure or other change in operating status. Journal of General Internal Medicine, 26(11), 1291-1296. https://doi.org/10.1007/s11606-011-1815-5

Pink, G. H., Holmes, G. M., D'Alpe, C., Strunk, L. A., McGee, P., & Slifkin, R. T. (2006). Financial indicators for critical access hospitals. The Journal of Rural Health, 22(3), 229-236. https://doi.org/10.1111/j.1748-0361.2006.00037.x