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 MEMORANDUM 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:/www.treasurer.state.nc.us 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 liabilities. 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 2000. Year 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.