IHP 630 Module 2 Financial Statement Paper Example

What the Numbers Say: Financial Statement Analysis for Stonebridge Regional Medical Center

[Student Name]

Southern New Hampshire University

IHP 630: Healthcare Finance and Reimbursement

Module Two 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 the Numbers Say: Financial Statement Analysis for Stonebridge Regional Medical Center

Stonebridge Regional Medical Center's audited statements for the last fiscal year run to forty pages. Its board, mostly local business owners and physicians, wants to know what those pages mean for the hospital's future. This paper summarizes the income statement and balance sheet, calculates key ratios, compares them with similar hospitals and explains what the results imply.

Why Ratios

Pink et al. (2006) developed a set of financial indicators for small rural hospitals, grouped into profitability, liquidity, capital structure, revenue, cost and utilization, and argued that comparing a hospital's indicators with those of peers helps managers and boards spot problems early and track improvement. Ratios turn raw dollar amounts into measures that can be compared across hospitals of different sizes and over time.

The Income Statement

Net patient service revenue was $296 million and other operating revenue $14 million, for total operating revenue of $310 million. Operating expenses were $315.6 million, including salaries and benefits of $166 million, supplies of $54 million, depreciation of $17 million and interest of $6.2 million. The operating loss was therefore $5.6 million. Investment income of $4.1 million reduced the overall shortfall to $1.5 million.

The Balance Sheet

Stonebridge held $50.7 million in cash and investments, net patient accounts receivable of $47.6 million and total current assets of $98 million against current liabilities of $61 million. Long-term debt stood at $142 million, and net assets, the nonprofit equivalent of equity, were $168 million. Accumulated depreciation on buildings and equipment totaled $221 million.

Profitability

Operating margin equals operating income divided by operating revenue: minus $5.6 million divided by $310 million, or minus 1.8%. The peer median is about 2.5%. A negative margin means the hospital's core services cost more than they earn, and it has relied on investment income to limit the loss.

Liquidity

Days cash on hand measures how long the hospital could pay its bills from cash alone. Daily cash expenses are operating expenses minus depreciation, $298.6 million, divided by 365, or about $818,000. Dividing $50.7 million by $818,000 gives about 62 days, compared with a peer median of about 150. Short-term strength is captured by the current ratio; here $98 million over $61 million comes to or 1.61, close to the peer median of 1.8. Days in accounts receivable, net receivables divided by daily net patient revenue of about $811,000, equals about 59 days, against a peer median of 47.

Capital Structure

Debt to capitalization equals long-term debt divided by debt plus net assets: 142 divided by 310, or about 46%, above the peer median of 35%. Debt service coverage measures whether cash flow covers annual principal and interest. Adding the $1.5 million shortfall to depreciation and interest gives minus 1.5 plus 17 plus 6.2, or $21.7 million; dividing by principal of $8.4 million plus interest of $6.2 million gives 1.49. Stonebridge's bond covenant requires at least 1.25, so the hospital is within its covenant but with a thin cushion.

Age of Plant

Average age of plant, accumulated depreciation divided by annual depreciation, is 221 divided by 17, or 13 years, compared with a peer median of about 11. Older facilities signal deferred investment, which often shows up later as higher maintenance costs and difficulty attracting physicians and patients.

Summary of Ratios

The table summarizes the seven ratios against peer medians drawn from the state hospital association's benchmarking report.

Table 1. Stonebridge Ratios Compared With Peer Medians

Note. Composite statements; peer group of 24 nonprofit hospitals with 150 to 250 beds.

Why Weak Finances Matter for Patients

Financial weakness is not only a balance sheet problem. Ly et al. (2011) grouped U.S. hospitals by operating margin and found that those with the lowest margins performed somewhat worse on several quality measures and were considerably more likely to close or undergo a change in operating status over the following years. Akinleye et al. (2019) systematically reviewed studies of hospital finances and quality and found that most reported an association between stronger financial performance and better quality or safety, although results were mixed and the direction of cause was not always clear.

Reading Beyond the Ratios

The notes to the financial statements add context the ratios miss. They show that Stonebridge's pension liability grew by $6 million last year, that charity care at cost was $9.8 million and that the hospital recorded $4.2 million in supplemental Medicaid payments that the state has proposed reducing. Each of these could move future results. The management discussion also notes that inpatient volume fell 3% while outpatient visits rose 6%, a shift that lowers revenue per encounter because outpatient care is paid less than inpatient stays. Together these details suggest that next year's margin could worsen further without deliberate action on costs and revenue.

What the Board Should Focus On

Three findings stand out. First, the operating loss must be reversed, since investment income cannot be relied on in weak markets. Second, low cash and slow collections leave little room for error; bringing receivable days from 59 to the peer median of 47 would release about $9.7 million in cash. Third, the thin debt service cushion and aging plant limit the hospital's ability to borrow for needed investment.

Limitations

Ratios describe one year and should be tracked over at least three to reveal trends. Peer medians vary by source, and differences in accounting choices, such as how charity care is recorded, can affect comparisons. The analysis does not yet examine service line profitability, which later milestones will address.

Conclusion

Stonebridge's statements show a hospital losing money on operations, with thin cash, slow collections, elevated debt and aging facilities, though still within its bond covenant. The ratios point the board toward three priorities: restore operating margin, speed collections and protect borrowing capacity. Tracking the same seven ratios each quarter will show the board whether the plan is working.

References

Akinleye, D. D., McNutt, L.-A., Lazariu, V., & McLaughlin, C. C. (2019). Correlation between hospital finances and quality and safety of patient care. PLOS ONE, 14(8), Article e0219124. https://doi.org/10.1371/journal.pone.0219124

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