The Financial Management of Hospitals and Healthcare Organizations
Michael Nowicki
Chapter 14
Financial Analysis and Management Reporting
Taryn D. Davis
June 26, 2007

Steps in financial analysis
o Establishment of the facts in the organization
 Reviewing key financial statements (balance sheets, income statement, etc)
o Comparison of the facts in the organization over time and to facts in similar
organizations
 Ratio analysis
 Computes relationships between items
 4 types
o liquidity
o profitability
o activity
o capital structure
 Horizontal analysis
 Focuses on percentage change over time
 Vertical analysis
 Focuses on base number
 Shows percentages of important line items in relation to the base #
o The use of perspective and judgment to make decisions regarding the comparisons
 Uses outcomes from above 2 steps, along with decision maker’s judgment in
order to make the decision

Balance sheet
o Shows organization’s financial position at a specific point in time.
o Presents assets, liabilities, and net assets and their relationships
o Assets = liabilities + net assets
 Assets
 Resources that benefit the organization
 Current assets are resources that have a life of less than one year. They
are listed on balance sheet in terms of liquidity. Cash is the most liquid
asset.
o Current assets include: cash, short-term investments, patient
accounts receivable
 Long-term assets have a life over one year
 Liabilities
 Economic obligations, or debts, that are due in more than one year
 Net assets
 The difference between assets and liabilities in a non-profit
organization
 Shareholder’s Equity
 The difference between assets and liabilities in a for-profit
organization
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Chapter 14

Statement of Operations (income statement)
o Summarizations the net revenues, expenses, and excess of net revenues over
expenses (or income before taxes) over a period of time.
o For-profit organizations
o Assets = liabilities + net assets + (net revenue – expenses)
o Four categories of revenue
 Net patient service revenue (money generated for providing patient care
minus an estimate of how much money the organization will not collect as a
result of discounted charges and charity care)
 Premium revenue (money from capitation arrangements)
 Other revenue (not from health services to patients and enrollees)
 Net assets released from restrictions used for operations (previously restricted
by donors)
o Five categories of expenses
 Operating expenses (employee wages, supplies, pharma, etc)
 Depreciation and amortization (the expensing of long-term assets over time to
reflect their declining value)
 Provisions for bad debt (estimate of how much money the organization will
not collect, must be based on charges
 Other expenses (miscellaneous)
o Operating income (money earned from providing patient care and includes the total
revenue, gains, and other support minus the total expenses
o Other income (ex. investment income)

Statement of Changes in Net Assets
o Known as equity in a for-profit organization
o Shows how net assets change from beginning to the end of a statement period
o Shows how the changes in excess of revenues over expenses affect the net asset of
an organization
o Net realized and unrealized gains on investments – an increase in the value of the
investment (unrealized until sold) and an increase in cash (realized through interest)

Statement of Cash Flows
o Shows cash receipts (from whom) and cash disbursements (to whom)
o Divided into cash flows from:
 Operations
 Investments (property, equipment, selling fixed assets)
 Financing (debt, grants, endowments)

Ratio Analysis
o Tool to analyze financial information
o Compares the facts over time
o Liquidity Ratios (ability to meet short-term obligations)
 Current ratio = total current assets/total current liabilities
 Indicates financial liquidity. Higher value = better debt-paying
capacity. Too high a value results in opportunity costs that the
organization could invest excess current assets
 Average Collection period= net receivables/(net patient service revenue/365)
 Days in accounts receivable. How long until bill gets paid
 Days cash-on-hand (short-term) = cash + marketable securities/((total
expenses – depreciation expenses)/365)
 How long can the organization meet its obligations if it received no
more cash. Higher value = more liquidity
 Average payment period = total current liabilities/((total expenses –
depreciation expenses)/365)
 How long it takes to pay its obligations. Lower value = more liquidity
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Chapter 14

o
Profitability ratios (Organization’s ability to exist and grow)
 Operating margin = operating income/total operating revenue
 Total margin = excess of revenues over expenses/total revenue
 Return on net assets = excess of revenues over expenses/net assets
 For all three: Higher value = more profitability
o
Asset Efficiency ratios (Reflects the organization’s ability to be efficient)
 Total asset turnover = total operating revenue + other income/total assets
 How efficient is an organization in using its assets in relation to making
revenue
 Average age of a facility = accumulated depreciation/depreciation expense
 Want a lower value
 Fixed asset turnover= total operating revenue+ other income/net fixed assets
 Current asset turnover= total operating revenue+other income/current assets
 For both, high values = more efficiency
 Inventory turnover = total operating revenues + other income/inventory
 Lower values indicate overstock
o
Capital Structure Ratios (reflects organizations long-term liquidity)
 Net asset financing = net assets/total assets
 Want high value
 Long-term debt to net assets = long-term debt/net assets
 Want low value
 Debt services coverage = (excess of revenues over expenses + depreciation +
interest)/(principal payment + interest)
 Ability to meet long-term debt obligations.
 Want high value
 Cash flow to debt = (excess of revenues over expenses +
depreciation)/(current liabilities + long-term debt)
 Ability to meet short and long-term obligations
 Want high value
Operating Indicators
o Average length of stay (ALOS) = patient days/discharges
o Occupancy rate = patient days/(365*licensed beds)
 Measures capacity (percentage of hospital being used)
o Outpatient revenue as a percentage of total patient revenue = outpatient
revenue/total revenue
 Want high values
o Salary per FTE = salaries/FTE
 Measures average direct labor expense per employee
 Want low value
o Compensation costs per discharge = (inpatient salary costs + inpatient benefit
costs)/discharges
 Want low value
Terms
Current ratio = basic indicator of financial liquidity
Amortization = expensing of long-term assets over time to reflect their declining value
Occupancy rate = capacity or percentage of hospital being used
FTE = full-time equivalents
Assets = liabilities + net assets
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