HCM 400 Module 4 Project One Example

Project One: How Pine Hollow Compares, a Ratio Analysis

[Student Name]

Southern New Hampshire University

HCM 400: Healthcare Finance

Project One

[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.

Project One: How Pine Hollow Compares, a Ratio Analysis

Raw financial numbers mean little without comparison. A $0.9 million operating loss might be alarming for one hospital and routine for another. This project converts Pine Hollow Memorial Hospital's financial statements into ratios, compares them with the median of similar critical access hospitals and uses research on rural hospital closures to judge where the hospital is strong, where it is vulnerable and what to fix first.

The Framework

Pink et al. (2006) built an indicator set tailored to critical access hospitals, covering how profitable, liquid and indebted these hospitals are and how they earn revenue, spend and use capacity, and published peer medians so that hospitals could compare themselves with others of similar size and circumstances. This project uses ten indicators from those groups, with peer medians from the state's critical access hospital benchmarking report.

Profitability

Operating margin equals operating revenue minus operating expenses, divided by operating revenue: minus $0.9 million divided by $38.0 million, or minus 2.4%, against a peer median of 1.1%. Total margin includes nonoperating income: $0.5 million divided by total revenue of $39.4 million, or 1.3%, against a peer median of 3.0%. Pine Hollow's core services lose money, and its small overall surplus depends on the county tax levy.

Liquidity

Days cash on hand equals cash and short-term investments divided by daily cash operating expenses: $4.8 million divided by $100,500, or about 48 days, against a peer median of 115. Receivable days take what payers still owe and divide it by one day of net patient revenue: $5.9 million divided by $96,400, or about 61 days, against a peer median of 47. Comparing short-term assets with short-term obligations gives a current ratio of $12.1 million divided by $7.6 million, or 1.59, against a peer median of 2.3. By every liquidity measure, Pine Hollow is weaker than its peers.

Capital Structure

For debt to capitalization, long-term debt is set against long-term debt plus net assets combined: $6.2 million divided by $21.0 million, or about 30%, against a peer median of 28%. Debt service coverage equals the excess of revenue over expenses plus depreciation and interest, divided by principal and interest payments: $3.1 million divided by $1.1 million, or about 2.8, against a peer median of 3.2 and a loan covenant minimum of 1.25. Debt levels are close to peers and manageable.

Age of Plant

Average age of plant equals accumulated depreciation divided by annual depreciation expense: $28.6 million divided by $2.2 million, or 13 years, against a peer median of 12. Older equipment, such as the eleven-year-old CT scanner, will require replacement soon, and thin cash makes that difficult.

Operating Indicators

Salaries and benefits as a share of operating expenses are $22.4 million divided by $38.9 million, or 58%, against a peer median of 54%, partly reflecting reliance on traveling nurses. Average daily census, acute and swing combined, is 9.5 patients, or 38% of beds, against a peer median of 34%, so volume is not the main problem. Outpatient revenue is 71% of total patient revenue, similar to peers.

Summary Table

The table brings the ten ratios together with peer medians and a simple assessment.

Table 1. Pine Hollow Ratios Compared With Peer Medians

Note. Composite figures; peer medians from a state critical access hospital benchmarking report.

Trends Over Three Years

To see direction as well as position, the analysis also reviewed the prior three years. Operating margin moved from 0.8% to minus 1.1% to minus 2.4%. Days cash fell from 71 to 58 to 48. Days in receivables rose from 52 to 57 to 61, coinciding with a billing system change and staff turnover in the business office. Salaries and benefits rose faster than revenue as traveling nurse use grew. Every key indicator is moving in the wrong direction, which makes the case for action more urgent than a single-year snapshot alone would suggest.

What Research Says About These Weaknesses

Kaufman et al. (2016) compared rural hospitals that closed with those that stayed open and found that closed hospitals had weaker profitability and liquidity in the years before closure, along with lower occupancy. Pine Hollow shares the profitability and liquidity weaknesses but not the low occupancy, which is a meaningful strength. Carroll et al. (2023) found that declining profitability often preceded closures and mergers among rural hospitals, suggesting Pine Hollow's three years of operating losses deserve attention now.

Strengths to Build On

The analysis is not all negative. Occupancy is above the peer median, driven by swing beds, and outpatient volume is healthy. Debt is manageable, leaving room to borrow if needed. Community support, shown by the tax levy, is an asset many rural hospitals lack.

Linking the Ratios

The ratios connect. Slow collections, 61 days against a peer median of 47, tie up about $1.3 million in cash that would raise days cash by about thirteen days if brought to the median. High labor costs, driven by traveling nurses, contribute to the operating loss. Improving either would help both profitability and liquidity.

Priorities

Three priorities emerge. First, speed collections by improving billing accuracy and follow-up. Second, reduce reliance on traveling nurses through recruitment and retention. Third, build cash reserves before the CT scanner must be replaced. Project Two will develop a plan around these priorities.

Limitations

Ratios describe one year; trends over three to five years would show whether conditions are improving or worsening. Benchmarks differ from one report to another, and choices in accounting, such as how tax levies are recorded, can affect comparisons.

Conclusion

Compared with similar critical access hospitals, Pine Hollow has weak operating profitability, thin liquidity and slow collections, but reasonable debt, solid occupancy and strong community support. Research on rural closures shows the weaknesses are serious warning signs, while the strengths give the hospital a foundation for improvement.

References

Carroll, C., Euhus, R., Beaulieu, N., & Chernew, M. E. (2023). Hospital survival in rural markets: Closures, mergers, and profitability. Health Affairs, 42(4), 498-507. https://doi.org/10.1377/hlthaff.2022.01191

Kaufman, B. G., Thomas, S. R., Randolph, R. K., Perry, J. R., Thompson, K. W., Holmes, G. M., & Pink, G. H. (2016). The rising rate of rural hospital closures. The Journal of Rural Health, 32(1), 35-43. https://doi.org/10.1111/jrh.12128

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