HA520 Unit 2 Hospital Financial Statement Analysis Example

Revenue Up Four Point Eight Percent, Expenses Up Nine Point Eight: A Financial Statement Analysis of a Composite 186-Bed Nonprofit Hospital, Reading the Statement of Operations Line Against Line and the Balance Sheet for Where the Strain Shows

[Student Name]

Purdue University Global

HA520: Health Care Financial Management

Unit 2 Financial Statement Analysis

[Instructor Name]

[Date]

The hospital and every figure are composite and bracketed; the condensed statements are simplified for a course analysis.

Reading a Nonprofit Hospital's Statements

A nonprofit hospital's statement of operations reports net patient service revenue rather than sales, and the excess of revenue over expenses rather than net income. Its balance sheet splits net assets into those without donor restrictions and those with donor restrictions, the presentation required for not-for-profit entities since the accounting standards update of 2016 (Financial Accounting Standards Board, 2016). Investment income is often reported below operating income, which matters for this hospital.

Statement of Operations, Condensed (Millions)

Prior year then current year, with change:

1. Total operating revenue: [$312.0], [$327.0], up [4.8] percent.

2. Salaries and benefits: [$160.0], [$174.9], up [9.3] percent; [53.5] percent of revenue.

3. Supplies: [$48.0], [$52.8], up [10.0] percent.

4. Purchased services, including agency staffing: [$30.0], [$35.3], up [17.5] percent.

5. Depreciation and interest: [$18.0], [$18.4].

6. Other expenses: [$36.9], [$40.2].

7. Total operating expenses: [$292.9], [$321.5], up [9.8] percent.

8. Operating income: [$19.1], [$5.5]; operating margin [6.1] to [1.7] percent.

9. Investment income: [$9.8] current year.

10. Excess of revenue over expenses: [$15.3] current year.

Horizontal Analysis

Horizontal analysis compares each line with the prior year; vertical, or common-size, analysis restates the lines as percentages of total revenue so years of different size can be compared (Cleverley & Cleverley, 2018). Every major expense line grew at about twice the rate of revenue. Purchased services grew fastest, because the hospital filled nursing vacancies with agency staff, booked as purchased services rather than salaries. Salaries grew because of market adjustments and overtime. Supplies rose with drug prices and surgical volume. Operating income fell by almost three-quarters while revenue grew, because every dollar of new revenue brought about two dollars of new expense.

Vertical Analysis

As a share of revenue, salaries and benefits rose from [51.3] to [53.5] percent and purchased services from [9.6] to [10.8] percent. Labor in all forms, staff plus agency, now takes about [64] percent of revenue. Operating income fell from [6.1] to [1.7] percent.

The Cushion Below the Line

Investment income of [$9.8] million kept the excess of revenue over expenses at [$15.3] million. That cushion sits outside operations and depends on financial markets. A hospital whose bottom line depends on investment returns while operations barely break even is more fragile than its total margin suggests. National research on hospital profitability has found that profits from patient care vary widely and that many hospitals lose money on patient care while earning from other sources (Bai & Anderson, 2016).

Balance Sheet, Condensed (Millions)

1. Cash and short-term investments: [$45.7] to [$40.5].

2. Patient accounts receivable, net: [$39.8] to [$44.9], up [12.8] percent.

3. Board-designated and other investments: up on market gains.

4. Current liabilities: up modestly with accrued agency invoices.

5. Long-term debt: down with scheduled principal payments.

Reading the Balance Sheet

Receivables grew [12.8] percent while revenue grew [4.8] percent, so the hospital is collecting more slowly; cash is tied up in unpaid claims. Operating cash shrank by [$5.2] million, while board-designated funds rose on market gains. The hospital is cash-poorer in operations and richer only on paper in its long-term investments.

The Agency Staffing Line

Purchased services deserve a closer look because they hide labor. Of the [$35.3] million, about [$14.6] million was agency nursing, up from [$9.1] million. At a premium of roughly [60] percent over employed nurses' hourly cost, replacing even half of those agency hours with employed staff would save about [$2.7] million a year, more than half of the current operating income. The line also shows why salaries alone understate labor cost.

What the Statements Cannot Show

The statements do not show why nurses left, why collections slowed or which service lines lost money. Those questions need departmental data and the ratio analysis that follows. The statements locate the strain; they do not diagnose it.

Synthesis

The statements tell one story. Labor costs, especially agency staffing, outran revenue; operating income collapsed; investment returns hid the fall in the bottom line; and slower collections drained operating cash. The next step is to measure these trends with ratios against peer hospitals.

Questions for Management

1. How much of purchased services is agency nursing, and what would it take to replace it with employed staff?

2. Why are collections slowing: payer mix, denials or billing delays?

3. What operating margin is needed to fund capital needs without relying on investment income?

Limits

Condensed statements hide detail, and one year of change can reflect unusual events. The cost and revenue categories are simplified, and real statements would include notes that change the reading.

Conclusion

Revenue growth did not protect the hospital. Expenses grew twice as fast, operations nearly broke even, and only investment income and slower-moving balance sheet items kept the picture from looking worse.

References

Bai, G., & Anderson, G. F. (2016). A more detailed understanding of factors associated with hospital profitability. Health Affairs, 35(5), 889-897. https://doi.org/10.1377/hlthaff.2015.1193

Cleverley, W. O., & Cleverley, J. O. (2018). Essentials of health care finance (8th ed.). Jones & Bartlett Learning.

Financial Accounting Standards Board. (2016). Accounting Standards Update No. 2016-14: Not-for-profit entities (Topic 958): Presentation of financial statements of not-for-profit entities. Financial Accounting Foundation.