Balance Sheets and Ratio Analysis N287E Spring 2006 Joanne Spetz 5 April 2006.

Balance Sheets and Ratio Analysis

N287E Spring 2006Joanne Spetz5 April 2006

Administrative news

Our classroom is now C701, except… April 26, either U506 or the Bailey

Lounge May 10, HSW 303

Next week – guest lecturers Do the reading in advance!

What did we do last time?

Defined “health economics”Defined “utility”Graphed indifference curvesTalked about marginal costs and marginal benefitsLearned the supply and demand magic

What did we do last time?Defined “perfect competition”Learned why perfect competition does not exist in health careTalked about nursing shortages Short-term supply and demand Long-term supply and demand

Questions for you…

Is there an economic case for addressing nursing shortages? Do you think Huston 2003 makes the

case well? Why or why not?

What are the costs to our economy of nursing shortages? Rivers et al., 2005, recommends

Magnet Certification as a key strategy. Do you agree?

Questions for you…

Do you think the model proposed by Spetz & Given (2003) is adequate? What issues did they ignore in their

analysis?

And on with the show…

How do we assess the financial impact of anything on health care?

How do we assess whether firms are profitable?

Profitability has many components Immediate profit Investments that lead to future profits

In health care many firms are not-for-profit Religious and not-for-profit hospitals Community clinics

Firms keep records of financial information

Most financial information is available to the public For-profit firms must share information

if they are publicly held (stocks) Not-for-profit firms have an obligation

to the public and must have information available

Some states require reporting

What financial information do we want?

Financial sheets Balance sheet Statement of revenues and

expenses Statement of cash flows Statement of change sin fund

balances or net assets Plus… footnotes to all these

Firms report financial data in standard way

Financial sheets contain information about firm financial performanceFor most companies, these data are available to the publicThere are many accounting tricks to make these sheets “look good”

Balance Sheets

The Balance Sheet provides the present value of the firmTwo sections: Assets Current liabilities and equity

Assets = liabilities + equityEquity (roughly) measures the value of the company Equity = Assets - liabilities

Types of assets

Current assets (cash, securities, etc.)CURRENT ASSETS

Cash 1000 . .

Marketable securities 1010 . .

Accounts and notes receivable 1020 32930074 28955351

Less allowance for uncollectible receivables and third-party contractual withholds1040 -5272167 -4800200

Receivables from third-party payors 1050 . .

Pledges and other receivables 1060 . .

Due from restricted funds 1070 . .

Inventory 1080 2045540 1395953

Intercompany receivables 1090 . 2806424

Prepaid expenses and other current assets 1100 1175257 919661

TOTAL CURRENT ASSETS (Sum of lines 5 through 50) 30878704 29277189

Types of assets

Limited-use assets

ASSETS WHOSE USE IS LIMITED

Board designated cash 1110 . .

Board designated investments 1120 . 5371506

Board designated other assets 1130 . 13641

TOTAL ASSETS WHOSE USE IS LIMITED (Sum of lines 60 through 70) . 5385147

Types of assets

Property, plant, and equipment (PPE) Note PPE is depreciated to get net

PPEPROPERTY, PLANT AND EQUIPMENT - AT COST

Land 1200 5077823 5077823

Land improvements 1210 3377479 3377479

Buildings and improvements 1220 128124035 119201930

Leasehold improvements 1230 . .

Equipment 1240 67896803 63305030

TOTAL PROPERTY, PLANT AND EQUIPMENT (Sum of lines 80 through 100) 204476140 190962262

Less accumulated depreciation and amortization 1260 -139291961 -129780060

NET TOTAL PROPERTY, PLANT AND EQUIPMENT (Sum of lines 105 & 195) 65184179 61182202

Construction in progress 1250 7773659 12526131

Types of assets

Investments, other assets

INVESTMENTS AND OTHER ASSETS

Investments in property, plant and equipment 1310 $ $

Less accumulated depreciation - investments in plant and equipment 1320 ( )( )

Other investments 1330

Intercompany receivables 1340

Other assets 1350 998533 1592875

TOTAL INVESTMENTS AND OTHER ASSETS (Sum of lines 210 through 230) 998533 1592875

Types of assets

Intangible assets Very hard to value There are some strong rules about

valuation

INT ANGIBLE ASSET S

Goodwill 1360 $ $

Unamort ized loan costs 1370

Preopening and other organizat ion costs 1380

Other intangible assets 1390

T OT AL INT ANGIBLE ASSET S (Sum of lines 245 through 260) $ $

Types of assets (restricted funds)

Specific purpose fundsSPECIFIC PURPOSE FUNDS

Cash 1510 $ $

Investments:

Marketable Securit ies 1521

Other Investments 1529

Receivables 1530

Due from other funds 1540

Other assets 1550 T OT AL SPECIFIC PURPOSE FUND ASSET S (Sum of lines 5 through 30)$ $

Types of assets (restricted funds)

Plant replacement & expansion fundsPLANT REPLACEMENT AND EXPANSION FUNDS

Cash 1410 $ $

Investments:

Marketable Securit ies 1421

Mortgages investments 1422

1423

Real P roperty (net of accumulated depreciat ion) 1424

Other investments 1429

Receivables 1430

Due from other funds 1440

Other assets 1450

T OT AL PLANT REPLACEMENT AND EXPANSION FUND ASSET S (Sum of lines 105 through 140) $ $

Types of assets (restricted funds)

EndowmentENDOWMENT FUNDS

Cash 1610 $ $Investments

Marketable Securit ies 1621

Mortgages 1622

1623

Real property (net of accumulated depreciat ion) 1624

Other investments 1629

Receivables 1630

Due from other funds 1640

Other assets 1650 T OT AL ENDOWMENT FUND ASSET S (Sum of lines 205 through 240)$ $

Types of liabilities

Current liabilitiesCURRENT LIABILIT IES

Notes and loans payable 2010 . .

Accounts payable 2020 4488602 3956068

Accrued compensat ion and related liabilit ies 2030 6016768 5289760

Other accrued expenses 2040 . 8192071

Advances from third-party payors 2050 . .

Payable to third-party payors 2060 8236977 7583598

Due to rest ricted funds 2070 . .

Income taxes payable 2080 . .

Intercompany payables 2090 1010880 .

Current maturit ies of long-term debt (Must agree with line 125) 5188695 5188695

Other current liabilit ies 2100 3648774 2345909

T OT AL CURRENT LIABILIT IES (Sum of lines 5 through 55) 28590696 32556101

Types of liabilities

Deferred credits

DEFERRED CREDIT S

Deferred income taxes 2110 $ $

Deferred third-party income 2120

Other deferred credit s 2130

T OT AL DEFERRED CREDIT S (Sum of lines 65 through 75) $ $

Types of liabilities

Long-term debtLONG-T ERM DEBT Unpaid P rincipal (a)

Mortgages payable 2210 . .

Const ruct ion loans 2220 . .

Notes under revolving credit 2230 . .

Capital lease obligat ions 2240 . .

Bonds payable 2250 70938710 76127398

Intercompany payables 2260 . .

Other non-current liabilit ies 2270 . .

T OT AL LONG-T ERM DEBT (Sum of lines 85 through 115) 70938710 76127398

Less amount shown as current maturit ies (Must agree with line 50) -5188695 -5188695

NET T OT AL LONG-T ERM DEBT (Sum of lines 120 and 125) 65750015 70938703

T OT AL LIABILIT IES (Sum of lines 60, 80, and 130) 94340711 103494804

Types of liabilities (restricted funds)

Money due to the restricted funds Specific purpose funds Plant replacement & expansion Endowment funds

Components of equity

Non-profit (fund balance)For-profit Stock Capital Retained earnings

Statement of Revenues and Expenses

Presents the year’s earningsPresents the year’s expenses

Calculates the income or loss from operations

Components of statement of income

Operating revenues Deductions from revenue

Operating expensesTaxesNon-operating revenuesNon-operating expenses

Operating revenues

Money the firm receivesOPERAT ING REVENUES:

Daily hospital services 155300397 147244085Ambulatory Services 28563590 28272356Ancillary Services 303460892 255552841 GROSS PAT IENT REVENUE (Sum of lines 5 through 15) 487324879 431069282

DEDUCT IONS FROM REVENUE: (From Line 395 ) 339709812 299457907CAPIT AT ION PREMIUM REVENUE: (From Line 450) . 3198280

NET PAT IENT REVENUE (Line 30 minus line 105 plus line 107) 147615067 134809655T OT AL OT HER OPERAT ING REVENUE: 719604 833348

T OT AL OPERAT ING REVENUE (Sum of lines 110 and 135) 148334671 135643003

CAPIT AT ION PREMIUM REVENUE:Capitat ion P remium Revenue - Medicare (credit balance) . .Capitat ion P remium Revenue - Medi-Cal (credit balance) . .Capitat ion P remium Revenue - County indigent programs (credit balance) . .Capitat ion P remium Revenue - Other third part ies (credit balance) . 3198280 T OT AL CAPIT AT ION PREMIUM REVENUE (Sum of lines 430 thru 445) 3198280

Deductions from revenues

Particularly relevant for health care…DEDUCT IONS FROM REVENUE:

Provision for bad debts 9185535 5702139Cont ractual adjustments - Medicare - t radit ional 128003963 103533060Cont ractual adjustments - Medicare - managed care . .Cont ractual adjustments - Medi-Cal - t radit ional 26113487 45703068Cont ractual adjustments - Medi-Cal - managed care 41427394 .Disproport ionate share payments for Medi-Cal pat ient days (SB 855) (credit bal.) (a). .Cont ractual adjustments - County indigent programs - t radit ional . .Cont ractual adjustments - County indigent programs - managed care . .Cont ractual adjustments - Other third part ies - t radit ional 17316342 141830777Cont ractual adjustments - Other third part ies - managed care 112918743 .Charity discounts - Hill Burton . .Charity discounts - other 2530079 1664961Rest ricted donat ions and subsidies for indigent care (credit balance) . .T eaching allowances (T eaching Hospitals only) . .Support for clinical t eaching (credit balance) (T eaching Hospitals only) . .Policy discounts . .Administ rat ive adjustments . .Other deduct ions from revenue 2214269 1023902 T OT AL DEDUCT IONS FROM REVENUE (Sum of lines 300 thru 385) 339709812 299457907

Operating expenses

What does it cost to run the business?OPERAT ING EXPENSES:

Daily Hospital Services 29036668 28871378Ambulatory Services 11919070 11940609Ancillary Services 43877350 46180118Research Costs . .Educat ion Costs . .General Services 17136879 20093476Fiscal Services 4892972 5367157Administ rat ive Services 24053044 17020112Unassigned Costs 11403717 8407828Purchased Inpat ient Services . 218178Purchased Outpat ient Services . . T OT AL OPERAT ING EXPENSES (Sum of lines 146 through 195) 142319700 138098856 NET FROM OPERAT IONS (Line 140 minus line 200) 6014971 -2455853

Taxes

Only if you’re a for-profit company

PROVISION FOR INCOME T AXES:Current . .Deferred . .

Non-operating revenueRevenue that isn’t connected to your line of business

NON-OPERAT ING REVENUES:Gains on sale of hospital property 9010 2,464,008 .Maintenance of rest ricted funds revenue 9030 . .Unrest ricted cont ribut ions 9040 414,737 196,219 Donated services 9050 . .Income, gains and losses from unrest ricted investments 9060 216,531 1,615,124 Unrest ricted income from endowment funds 9070 . .Unrest ricted income from other rest ricted funds 9080 . .T erm endowment funds becoming unrest ricted 9090 . .T ransfers from rest ricted funds for non-operat ing expenses 9100 . .Assessment revenue (b) 9150 . .County allocat ion of taxes revenue (b) 9160 . .Special dist rict augmentat ion revenue (b) 9170 . .Debt service taxes revenue (b) 9180 . .State homeowner's property tax relief (b) 9190 . .State appropriat ion 9200 . .County appropriat ion - Realignment funds 9210 . .County appropriat ion - County general funds 9220 . .County appropriat ion - Other county funds 9230 . .Physicians' offices and other rentals - revenue 9250 . 86,668 Medical office building revenue 9260 3,680,320 3,719,106 Child care services revenue (non-employees) 9270 . .Family housing revenue 9280 . .Retail operat ions revenue 9290 195,740 241,523 Other non-operat ing revenue 9400 88,604 1,350,484 T OT AL NON-OPERAT ING REVENUE (Sum of lines 500 thru 615) 7,059,940 7,209,124

Non-operating expensesCosts that aren’t associated with your production

NON-OPERAT ING EXPENSES:Losses on sale of hospital property 9020 . .Maintenance of rest ricted funds expense 9030 . .Physicians' offices and other rentals expense 9510 . 2,050 Medical office building expense 9520 2,747,317 2,864,636 Child care services expense (non-employees) 9530 . .Family housing expense 9540 . .Retail operat ions expense 9550 183,234 195,285 Other non-operat ing expense 9800 1,551 . T OT AL NON-OPERAT ING EXPENSE (Sum of lines 640 thru 675) 2,932,102 3,061,971

Add it all up and you get…Net income

NET FROM OPERAT IONS (Line 140 minus line 200) 6014971 -2455853

NET NON-OPERAT ING REVENUE AND EXPENSE: (From Line 700) (c) 4127838 4147153

NET INCOME BEFORE T AXES AND EXT RAORDINARY IT EMS: (Sum of lines 205 and 210) 10142809 1691300

PROVISION FOR INCOME T AXES:Current . .Deferred . .

NET INCOME BEFORE EXT RAORDINARY IT EMS: (Line 215 minus 220 and 225) 10142809 1691300

EXT RAORDINARY IT EMS: (Specify)$ $

NET INCOME (Line 230 minus lines 235 and 240) 10142809 1691300

It can be important to adjust for inflation

Inflation can increase value of assetsInflation can decrease cost of debtsInflation increases cost of future investment

To deal with future costs…

Future costs come from: Inflation Investments

Firms must have increases in their assets Assets = liabilities + net assets Asset increases come from increases in

Debt Equity

Ways to measure growth

Growth Rate in Equity (GRIE)GRIE=equity = net income x

equity equity equity net inc.

= return on equity = (net income/equity)

reported income index (net income/equity)

How to interpret GRIE…

If a firm has no equity source other than net income No endowment No government transfers

…then the reported income index = 1

GRIE is sometimes called Return on Equity (ROE)

To break down ROE more…

ROE=net op income+net nonop income

revenue

x revenue x assetsassets equity

To go farther than this…

Ratio analysis Liquidity ratios – ability of firm to meet

short-term financial obligations Capital structure ratios – quality of

capital of firm Activity ratios – revenues and expenses Profitability ratios – revenues vs.

expenses Other ratios

We can benchmark ratios

Ratios get compared to national or regional averages/medians Different ratio goals for different

industries

In your problem set you will be computing ratios