Health Statement of Operations and Financial Statements.

Part 1: Statement of Operations and Financial Statements

Statement of Operations and Financial Statements

1. List several efforts that have been enacted by payors to control costs.

Explain the ramifications of allowing/disallowing an individual to be able to sue his or her HMO.

2. What are each of the financial statements commonly called

1. What is the analogous for-profit statement called? What are the main sections of the statement of operations?

2. What are revenues, gains, and other support?

3. What are expenses and losses?

4. Funds released from restricted net assets to unrestricted net assets are presented in what section of the statement of revenue, expenses and other activities?

The following questions relate to the statement of changes in net assets.

1. What is the traditional name for this statement?

2. What is the purpose of this statement?

3. What are the main sections of this statement?

4. Discuss the difference between permanently restricted and temporarily restricted net assets.

The following questions relate to the statement of cash flows of a not-profit health care organization.

1. What are its main sections?

2. 2. What is the purpose of this statement?

3. 3. Where in the financial statements would there be important explanatory information?

4. 4. In what financial statement would one identify the purchase of long-term investments?

5. 5. How does the accrual basis of accounting differ from the cash basis of accounting?

Part 2: Accrual vs. Cash Basis Accounting & Balance Sheet

1. Explain the difference between the accrual basis of accounting and the cash basis of accounting. What are the major reasons for using accrual accounting?

2. 2. What are the purpose of a journal and a ledger?

3. 3. Explain what a “prepaid expense” is and how it is recorded on the ledger as a transaction.

4. 4. What are the major differences in recording transactions for a for-profit organization versus a not-for-profit, or are there any?

5. 5. List and record each transaction for S. Zee Outpatient Clinic under the accrual basis of accounting at December 31, 20X1. then develop a balance sheet as of December 31, 20X1, and a statement of operations for the year ended December 31, 20X1.

6. The clinic received a $3,000,000 of unrestricted cash contribution from the community. (this transaction increases the unrestricted net assets account.)

7. 6. How do capital structure rations and liquidity rations differ in providing insight into an organization’s ability to pay debt obligations?

8. 7. Identify and explain two situations where an organization might have increasing activity rations but declining profitability.

Part 3: The Working Capital Cycle and the Cost of Credit

Maximizing Revenue and Expenditures

Explain how the four kinds of float (billing, collections, transit and disbursement) can be used to maximize the efficiency of incoming revenues and outgoing expenditures? What kinds of policies can be initiated to facilitate maximum efficiency and why?

The Working Capital Cycle and the Cost of Credit

1. In terms of cash flow, what are the stages of the working capital cycle?

2. Describe the two components of a working capital management strategy.

Involves billing the clients for the services offered.

3. What are the two types of unsecured bank loans? Describe each.

4. In the hospital’s billing process, why is medical records a critical department?

5. Identify the alternatives for investing cash on a short-term basis, and discuss the general characteristics of each.

6. List three ways to measure accounts receivable performance.

7. Identify and define two methods to finance accounts receivable.

8. Compute the annual approximate interest cost of not taking a discount using the following scenarios. What conclusion can be drawn from the calculations?

2/10 net 202/10 net 302/10 net 402/10 net 502/10 net 60
A Discount percent2%2%2%2%2%
B period1010101010
C payment due2030405060
D days/year365365365365365
A/(1-A)*D/(C-B)74%37%25%19%15%

Conclusion: from the above table, I can conclude that; when the payment time is longer, the associated costs are lower and vice versa.

Answers for numbers 9, 10, 11 & 12 are in the table below

9. On January 2, 20X1, City Hospital established a line of credit with First Union National Bank. The terms of the line of credit called for a $200,000 maximum loan with an interest of 11 percent. Then compensating balance requirement is 15 percent of the total line of credit (with no additional fees charged).

10. What is the effective interest rate for City Hospital if 50 percent of the total amount were used during the year?

11. How would the answer to part of a change if the additional fees were $500?

12. How would the answer to part of a change if the additional fees were $1,000?

Part 4:

Rate of Return & Net Present Value

A. When using the IRR approaches, when can the internal rate of return be determined simply by dividing the initial outlay by the cash flows?

Will a decision that is based on NPV ever change if it were based on IRR instead?

Why or why not?

Certainty, Inflation & Opportunity Cost

B. Is it better to receive money today or money in the future? In your answer be sure to include the principles or certainty, inflation, and opportunity cost.

Investment Payback Calculation

1. What is the difference between simple interest and compound interest?

2. What is the future value of $10,000 with an interest rate of 16 percent and one annual period of compounding?

With an annual interest rate of 16 percent and two semi-annual periods of compounding?

With an annual interest rate of 16 percent and four quarterly periods of compounding?

3. What is the relationship between the present value factor and future value factor?

4. Compare the results of the present value of a $6,000 ordinary annuity at 10 percent interest for 10 years with the present value of a $6,000 annuity due at 10 percent interest for 11 years. Explain the difference.

5. If a nurse deposits $1,000 today in a bank account and the interests is compounded annually at 12 percent, what will be the value of this investment?

· Five years from now?

· Ten years from now?

· Fifteen years from now?

· Twenty years from now?

6. Comment of the following statement. “When a not-for-profit facility receives a contribution from a member of the community, the cost of capital is inconsequential when deciding how to use this contribution, because it is, in effect, free money.”

7. What are the primary drawbacks of the payback method as a capital budgeting technique?

8. Explain why pro forma income statements adjust for depreciation expense when developing projected cash flows for a project.

9. Will a decision that is based upon NPV ever change if it were based upon IRR instead? Why or why not?

Part 5: Debt Financing and Financial Investment Analysis

Loan Amortization

Land Hope Hospital has hired you to advise them on a loan they need to take out. Prepare a list of questions you will need them to answer in order to prepare an amortization schedule.

The possible questions include; what is the loan amount? For how long will they pay the loan? Is the repayment monthly? Quarterly? Or annually? What is the interest rate on the loan?

Capital Investment

A capital investment is expected to achieve long-term benefits for the organization.

These benefits generally fall into three categories.

Identify and discuss these categories.

Is there one category that seems to be more important than the others?

Are they independent or interdependent?

Break-even Analysis

Sure Care Health Maintenance Organization is seeking a managed care contract with a local manufacturing plant. Sure Care estimates that the cost of providing preventative and curative care for the 300 employees and their families will be $36,000 per month.

The manufacturing company offered Sure Care a premium bid of $200 per employee per month. If Sure Care accepts this bid and contracts with the manufacturing firm, will Sure Care earn a profit or loss for the year? How much?

Describe the steps you used to solve this question.

Issuing Debt and Bond Valuation

1. What avenues are available for for-profit and not-for-profit health care providers to increase their equity position?

2. What are the advantages and disadvantages to a taxpaying entity in issuing debt as opposed to equity?

3. Explain the difference between subordinate debentures and debentures.

4. Why would an investment banker syndicate a bond issue with other investment bankers?

5. If a $1,000 zero coupon bond with a 20-year maturity has a market price of $311.80, what is its rate of return?

6. A tax-exempt bond was recently issued at an annual 8 percent coupon rate and matures 20 years from today. The par value of the bond is

7. If a required market rates are 8 percent, what is the market price of the bond?

8. If required market rates fall to 5 percent, what is the market price of the bond?

9. Charles City Hospital plans on issuing a tax-exempt bond at the bond is

10. If required market rates are 6 percent, what is the value of the bond?

11. If required market rates fall to 12 percent what is the value of the bond?

12. At what required market rate (3,6, or 12 percent) does the above bond sell at a discount? At a premium?

13. Mercy Medical Mega Center, a taxpaying entity, has made the decision to purchase a new laser surgical device. The device costs $400,000 and will be depreciated on straight-line basis over five years to a zero salvage value. Mercy Medical could borrow the full amount at a 15 percent rate for five years. The after-tax cost of debt equals 9 percent. Alternatively, it could lease the device for five years. The before-tax lease payments per year would be $80,000. The tax rate for this Mega enter is 40 percent. From a financial perspective, should Mercy lease the surgical device or borrow the money to purchase it and why?

Part 6: The Break-Even Equation and Profit Calculation

Minimizing Errors in Projections

Break even analysis utilizes both current and projected figures. In a rapidly changing economy, there are many individuals who are finding that their initial break even analyses were incorrect.

In your opinion, what could be done to minimize errors in projections?

Break-even Analysis

Sure Care Health Maintenance Organization is seeking a managed care contract with a local manufacturing plant.

Sure Care estimates that the cost of providing preventative and curative care for the 300 employees and their families will be $36,000 per month.

The manufacturing company offered Sure Care a premium bid of $200 per employee per month. If Sure Care accepts this bid and contracts with the manufacturing firm, will Sure Care earn a profit or loss for the year? How much?

Describe the steps you used to solve this question

Issuing Debt and Bond Valuation

Break-Even Equation and Profit Calculation

1. What are the formulas for?

· The basis break-even equation

· The basis breakeven equation expanded to include indirect costs and desired profit?

2. Explain the relationship between step-five costs and the relevant range

3. Based on the product margin, when is it in the best interests of an organization to continue or drop a service?

4. Laurie Vaden is a nurse practitioner with her own practice. She has developed contracts with several large employers to perform routine physical, fitness for duty exams, and initial screening of on-the-job injuries. She currently sees 150 per month, charging 450 per visit. Her total costs are $7,500, of which $1,500 is for supplies. She has decided that she needs to increase profit, so she is considering raising her fee to $65. She expects to lose 10 percent of her business to competitors that charge an average of 460 per visit. Determine her current and predicted: 1) revenues, 2) variable costs, and 3) total contribution margin. What do you recommend she do? Why?

5. Janet Gilbert is director of labs. She has some extra capacity and has contracted with some small neighbouring hospitals to run some of their lab tests. She has recently had a study conducted and has determined that her costs of these contracts are $10,000 of which $7,000 are for supplies and items related to each test. She currently charges an average of $10, 000per lab test. She is thinking of lowering her price by 20 percent in hopes of raising her current volume of 10,000 tests by 15 percent. Determine her current and predicted: 1) revenues, 2) variable costs, 3) total contribution margin, and 4) net income. What do you recommend she do? Why?

6. Shady Rest Nursing Home has 100 private pay residents. The administrator is concerned about balancing the ratio its private pay to non-private pay patients. Non-private pay sources reimburse an average of $100 per day whereas private pay residents pay average 100 percent of full daily charges. The administrator estimates that variable cost per resident per day is $25 for supplies, food, and contracted services and annual fixed costs are $4,562,500.

· What is the daily contribution margin of each non-private pay resident?

· If 25 percent of the residents are non-private pay, what will shady Rest charge the private pay patients in order to break even?

· What if non-private pay payors cover 50 percent of the residents?

7. The owner of Shady Rest Nursing Home insists that the facility earn $80,000 in annual profits. How much must the administrator raise the per day charge for the privately insured residents if 25 percent of the residents are covered by non-private pay payors?

Part 7: ROI and Variance Analysis

Strategic Planning and Budgeting

Discuss the role of strategic planning in the budgeting process. How does it differ from short-term planning? What are the advantages and disadvantages of the participatory approach to budgeting?

How Far to Carry a Strategic Plan

In strategic planning an organization wants to reach the overall targets, it responds to the competitive position of the organization in the social, economic and political environments and strives to develop strategies of adapting and influencing its position. Short term planning observes the features of the organization in the present and develop the strategies to improve them. The shortcomings.

Advantages and disadvantages of the participatory approach to budgeting?

How Far to Carry a Strategic Plan

Strategic planning should take at least 3 years to complete. This is beneficial because if favours organizations that are big in size as there is enough time to collect the necessary data, it also gives enough time to participants involved in planning. Three years will not be cost effective and may be a source of stress to the planners.

ROI and Variance Analysis

1. What are the major components of the planning/control cycle?

2. What are the four major budgets of a health care organization? Briefly discuss each

3. Describe the four types of responsibility centers, including the characteristics of each

4. What are transfer prices? Discuss their major disadvantages.

5. Name two financial measures used to judge the performance of investment centers that are not used to measure the financial performance of profit centers

6. What does the term “variance analysis mean when applied of financial performance of health care organizations?

7. A new cardiac catheterization lab was constructed at Havea Heart Hospital. The investment for the lab was $450,000 in equipment costs and $50,000 in renovation costs. A desired return on investment is 12 percent. Once the lab was constructed, 5,000 patients were served in the first year and were charged $340, for each procedure. The annual fixed cost for the catheterization lab is $1 million and the variable cost is $129 per procedure. What is the catheterization labs profit? Did this profit meet its desired ROI? Why or Why not

Part 8: Cost, Pay and Profit Analysis

1. Discuss the four major concerns of using the cost-to charge ration method

The used ratios may be characteristically for a specific industry and may not relate to another business.

2. What is the relationship between the concepts cost allocation basis as used in the step-down method and cost driver as used in ABC

3. What is the difference between a cost object’s direct cost and its fully allocated cost? Give an example.

4. What are the advantages and disadvantages of ABC relative to the step-down method of cost allocation?

5. Name the units of service on which cost-based payers may pay providers.

6. How do co-payments and deductibles reduce risk?

7. Why do providers desire “steerage”?

8. Who bears the risk under a flat is system? Why?

9. How do HMOs uses determine their premiums?

10. If an HMO covered 150,000 lives, expected 25 myocardial infarctions (MI) to occur each year within the covered lives, would expect a length of stay of 4.5 days for each MI, and had to pay an average of $950 per day for each day the MI patient was in the hospital, what would the PMPM cost of the HMO be? What would have to be charged to the patient/employer if the HMO had administrative costs equalling 10 percent of its costs and it wanted a profit margin of 7 percent?

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