Memorandum _ 819

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Memorandum _ 819 Powered By Docstoc
					                            State of North Carolina
                          Department of State Treasurer

HARLAN E. BOYLES                       State and Local Government Finance Division           ROBERT M. HIGH
TREASURER                                 and the Local Government Commission          DEPUTY TREASURER

                                                                                      Memorandum # 925

                                           November 2, 2000


TO:            County Officials; Public Hospital Officials; and
               Certified Public Accountants

FROM:          T. Vance Holloman, Director
               Fiscal Management Section

SUBJECT:       Report on Hospital Operations and Funding

This publication, "Report on Hospital Operations and Funding" has been prepared to
enable local officials to compare their financial results with the results of other similar
hospitals. Key items have been provided to allow users of this report to evaluate the
overall financial condition of each public hospital. To facilitate this analysis, hospitals
have been segregated into one of four groups: 500 beds and above, 250 to 499 beds, 100 to
249 beds, and 99 beds and below.

1999 Financial Performance

North Carolina public hospitals’ financial results in 1999 continued to show the strains that
have been characteristic of an industry that is responding to a changing environment.
These changes are in response to the requirements imposed by managed care, to
adjustments in Medicare/Medicaid reimbursements, and to an aging population. The
industry has also seen extensive mergers and acquisitions, including not only hospitals but
also physician practices, which have not necessarily resulted in increased profitability.
Despite increasing operating revenues, operating margins continued to decline from an
overall average of 6.04% in 1997 to 2.60% in 1999. This declining trend was observed in
all size groupings. Likewise, net income percentages continued their decline dropping
from 9.84% in 1997 to 2.53% in 1999. Once again, this trend was observed regardless of
hospital size. In addition, cash levels have decreased from a statewide average of 130.8
days cash on hand in 1997 to 107.6 days cash in 1999. It is important that administrators
and managers of public hospitals, along with leaders from their associated local
governments, closely monitor their financial operations to ensure continued viability in
this changing environment.

Taking the Financial Pulse of Public Hospitals

In assessing a hospital’s financial health, the amounts for a particular hospital should be
compared to hospitals of a similar size, to statewide averages, and to national performance
indicators published by organizations such as the credit rating agencies. If an amount is
determined to be significantly different than the statewide and/or group mean, the reasons
for the variance should be investigated. A significant deviation from the mean is not
necessarily an indication of a financial weakness, but instead may be an indication of a
significant event having taken place, such as major capital improvements to the hospital
system. Users of this report should note that hospitals may use different accounting
policies to arrive at the figures presented in this report, which could affect the
comparability of these statistics. Public hospitals are required to follow pronouncements of
the Governmental Accounting Standards Board (GASB) and pronouncements of the
Financial Accounting Standards Board (FASB) issued on or before November 30, 1989
(except FASB pronouncements that conflict with or contradict GASB). In addition, some
public hospitals have elected to apply all FASB pronouncements issued after November 30,
1989. Therefore, the hospitals presented in this report may vary in their application of
certain FASB pronouncements. (Note: See column headed “FASB” for the listing of the
hospitals that have elected to apply FASB Statements and Interpretations issued after
November 30, 1989.)

      325 North Salisbury Street, Raleigh, North Carolina 27603-1385 (919) 807-2350 (FAX 807-2352)
                                   Web Page http:/
                                An Equal Opportunity / Affirmative Action Employer
Memorandum #925
Page 2

Financial Results and Key Ratios of NC Public Hospitals
(Note: See “Key to Hospital Financial Statistics” at the end of this report for definitions of
these performance indicators.)

Financial Results

a. Operating margin. (Total operating revenues minus total operating expenses.) This
ratio is an indicator of the profitability of a hospital’s operating activities. If a unit’s
operating margin is significantly below the amounts for other similar units, it may be an
indication that net patient revenues are too low or that operating expenses are too high.

b. Net income. (Total operating and nonoperating revenues minus total operating and
nonoperating expenses.) This ratio is an indicator of the overall profitability of a hospital
after payments are made for interest on long-term debt and miscellaneous expenses.

c. Capital outlays. This ratio is a measure of the percentage of operating revenues that
have been invested in capital improvements. Hospitals should continue to make capital
improvements to their facilities and are encouraged to utilize sound management practices
by adopting long-range capital improvement plans to address their projected needs.
Situations where capital outlays are not being made on a consistent basis might indicate
the lack of a capital improvements plan.

Key Ratios

d. Quick ratio. (Current assets less inventories and prepaid items divided by current
liabilities.) This ratio gives an indication of the hospital’s ability to pay its current bills,
thereby providing a measure of short-term liquidity. Because the quick ratio is a snapshot
of a hospital’s liquidity at a point in time, it may vary considerably throughout the year. A
widely accepted minimum benchmark for the ratio of quick assets to current liabilities is 2
to 1; in other words, a hospital should have at least $2 in quick assets for each $1 of current

e. Days cash on hand. This ratio provides an indication of the adequacy of a hospital’s
cash and investment balances. A hospital needs to maintain adequate cash and investment
balances to enable it to survive a prolonged economic downturn or to take advantage of
strategic opportunities.

f. Days sales in receivables. This ratio gives an indication about how quickly payments
are being collected. Each unit should have procedures in place to ensure that patients will
make payments within the prescribed due date. If this ratio is much greater than the
maximum number of days allowed before payment is due, the unit may be inefficient in
collecting payments from patients. The inability to convert receivables into cash on a
timely basis negatively affects cash flows, and therefore, investment earnings.

g. Annual debt service coverage. This ratio is a measure of the degree of protection
creditors have from a default on debt service payments. As the ratio approaches 1 to 1,
there is a greater risk that the hospital will not be able to make its debt service payments
from its current year’s cash flows.

h. Debt to capitalization - This ratio provides an indication of how strong a hospital’s
finances are by comparing what it owes to the amount of its fund balance. It is typically
used by lenders in evaluating risk. A high ratio may be an indication of above average
debt levels and increased risk.

i. Dependence on Medicare/Medicaid. This ratio is a measure of the percentage of
Medicare/Medicaid     bed-days.   Since    hospitals   are  typically reimbursed for
Medicare/Medicaid patients at amounts lower than their standard rates, the higher this
ratio, the more at risk a hospital is to changes in reimbursement methodologies by the
federal and State governments.

For further information or assistance, please contact John Herron at (919) 807 2397.
                                                                       Memorandum # 925

                         Key to Hospital Financial Statistics

Number of beds in service

       Number of licensed beds for all types of care that were in service during the fiscal year. This
       number does include beds for nursing home care.

Credit rating - Moody’s

       The Moody’s hospital credit ratings were obtained from Mergent Bond Record, dated October


       For 1999, each hospital had a fiscal year end of September 30 except for the following:

                Fiscal Year Ended                                       Fiscal Year Ended
                     June 30                                               December 31
   Catawba Memorial Hospital                               Carolinas Healthcare System
   Hoots Memorial Hospital                                 Cleveland Memorial Hospital
   Stokes-Reynolds Memorial Hospital                       Nash Healthcare Systems and Subsidiaries

       The following units changed their fiscal year during the periods presented in this report. The
       changes are as follows:

                    Hospital                               1999          1998          1997              1996
    Cleveland Memorial Hospital                             12/3          12/3          9/30              9/30
                                                               1             1

Financial Results - This data was compiled from the unit’s audited financial statements.

       Total operating revenues

           Net patient revenues plus other operating revenues.

       Total operating expenses

           All operating expenses including depreciation and the provision for bad debts.

       Operating margin

           Total operating revenues less total operating expenses.

       Net income

           Total operating and nonoperating revenues less total operating and nonoperating expenses.
           For the purposes of this report, net income does not include extraordinary items, such as a
           gain or loss on refunding of debt.

       Capital outlays

           The actual amount spent on the purchase of capital assets.
Memorandum # 925

                   Key to Hospital Financial Statistics (continued)

Key Ratios - These ratios were compiled by the staff of the Local Government Commission from
audited financial statements unless otherwise noted.

       Quick ratio

                                           Total quick assets
                                         Total current liabilities

           Note: Quick assets do not include inventories or prepaid items.

       Days cash on hand

                (Cash and cash equivalents plus board designated funds for capital) x 365
                  Total operating expenses less depreciation and amortization expenses

       Days sales in receivables

                                       Net patient accounts receivable x 365
                                               Net patient revenue

       Annual debt service coverage

                                         Net revenue available for debt service
                                 Principal and interest requirements on long-term debt

       Net revenue available for debt service

           Net income plus interest expense, depreciation expense, and amortization expense

       Debt to capitalization

                                          Total long-term debt
                           Total long-term debt plus unrestricted fund balance

       Dependence on Medicare/Medicaid

           Percentage of Medicare/Medicaid bed-days divided by total bed-days.

           Note: Data was obtained from the North Carolina Department of Health and Human
                 Services, Division of Facility Services, Licensure and Certification Section

Group and statewide averages

    These amounts were compiled by the staff of the Local Government Commission from audited
    financial statements.

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