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UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT

   
                 
   

Chapter 13 -- Financial Condition Analysis

     
                 

PROBLEM 4

             

Consider the following financial statements for BestCare HMO, a not-for-profit managed care plan:

                 

 

 

 

                 BestCare HMO

 

 

 

   

      Statement of Operations and Change in Net Assets

   
     

        Year Ended June 30, 2XXX

     
     

                  (in thousands)

     

Revenue:

               

  Premiums earned

   

$26,682

       

  Coinsurance

   

$1,689

       

  Interest and other income

 

$242

       

    Total revenue

   

$28,613

       

Expenses:

               

  Salaries and benefits

   

$15,154

       

  Medical supplies and drugs

 

$7,507

       

  Insurance

   

$3,963

       

  Provision for bad debts

 

$19

       

  Depreciation

   

$367

       

  Interest

     

$385

       

    Total expenses

   

$27,395

       

Net income

   

$1,218

       

Net assets, beginning of year

 

$900

       

Net assets, end of year

   

$2,118

       

 

 

 

 

 

 

 

 

 

   

 

                 BestCare HMO

 

   
     

                  Balance Sheet

     
     

        Year Ended June 30, 2XXX

     
     

                  (in thousands)

     

Assets

               

  Cash and cash equivalents

 

$2,737

       

  Net premiums receivable

 

$821

       

  Supplies

     

$387

       

    Total current assets

   

$3,945

       

Net property and equipment

 

$5,924

       

Total assets

   

$9,869

       
                 

Liabilities and Net Assets

           

  Accounts payable - medical services

$2,145

       

  Accrued expenses

   

$929

       

  Notes payable

   

$141

       

  Current portion of long-term debt

$241

       

    Total current liabilities

 

$3,456

       

Long-term debt

   

$4,295

       

    Total liabilities

   

$7,751

       

Net assets (equity)

   

$2,118

       

Total liabilities and net assets

 

$9,869

       
                 

a. Perform a Du Pont analysis on BestCare. Assume that the industry average ratios are as follows:

 

Total margin

 

3.8%

       
 

Total asset turnover

 

2.1

       
 

Equity multiplier

 

3.2

       
 

Return on equity (ROE)

25.5%

       

b. Calculate and interpret the following ratios for BestCare:

     
       

Industry average

     
 

Return on assets (ROA)

8.0%

       
 

Current ratio

 

1.3

       
 

Days cash on hand

 

41 days

       
 

Average collection period

7 days

       
 

Debt ratio

   

69%

       
 

Debt-to-equity ratio

 

2.2

       
 

Times interest earned (TIE) ratio

2.8

       
 

Fixed asset turnover ratio

5.2

       

 

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