Paper on Organizational Financial Anaylsis

Organizational Financial Analysis

Financial analysis is the basis for successful and sustainable operations in an organization. Financial analysis helps achieve strategic goals, profitability, self-sufficiency, efficiency, liquidity, best financial and asset structure, minimize risks, and trend analysis. Ratio analysis enables managers to assess progress in achieving sustainability. Newton Medical Center provides medical facilities for the surrounding communities with a strong mission and vision. The purpose of this paper is to present a financial analysis of Newton Medical Center. The areas of focus are; dominant payers, key financial management principles, consumer payment trends, budget process, health/wellness, programs, evaluation of balance sheet and statement of operations, fraud compliance program, and the organization’s financial picture (Consultative Group to Assist the Poorest, n.d. & Newton Medical Center, 2007).
Fraud, Waste, and Abuse Compliance Program

Fraud, waste, and abuse (FWA) are widespread in the healthcare industry and generally result in increased healthcare costs. Facilities must have a FWA compliance program in place pursuant to both statutory and regulatory authorities. An effective program has a code of conduct articulating an organization’s commitment to ethical behavior. The code applies equally to every member of the organization and reflects the commitment to legal and ethical obligations. Preventing and combating fraud, waste, and abuse is the responsibility of each individual. Newton Medical Center’s corporate compliance handbook addresses ethical behavior, practices and standards relating to FWA, including a clear process for reporting infractions. Employees are provided a copy of the handbook and required to sign and submit the acknowledgment of receipt document located at the end of the handbook (Newton Medical Center, 2007).

Dominant payers

The main dominant payers for Newton Medical Center are Medicare, Medicaid, private insurance, and self pay. Medicare is a federal insurance program providing coverage for people over the age 65, blind, disabled, and with kidney failure or end-stage renal disease. The Medicare program is administered by the Health Care Financing Administration (HCFA) and pays for medical services and procedures determined as reasonable and necessary. Medicaid is a health insurance assistance program for low-income people sponsored by both federal and state governments. Medicaid is administered on a case-by-case basis. Coverage varies from state-to-state although each state program adheres to certain federal guidelines. Private health insurance is a form of group insurance where individuals pay premiums to cover high or unexpected healthcare expenses. Private insurance is mainly employee-based (All About Bleeding, 2005 & Minnesota Life, 2005).

Consumer Payment Trends

Consumer payment trends affect the payment performance in a hospital setting. The overall spending in hospital care makes up close to one third of total healthcare spending. Payers are targeting hospitals in a major effort to minimize expenses and pursuing long-term deals as a means to cap annual inflators. The hospital industry is experiencing the rising cost of goods, workforce shortage, and greater demand for services. Data-driven approaches are needed to guide decisions. Employers continue to cut benefits shifting more costs to employees through consumer-directed health plans or higher co-insurance amounts in traditional plans. The shift directly affects hospitals by increasing the burden for patient costs and conditions. Newton Medial Center’s health/wellness programs have specific consumer payment trends. The Fitness Forum shows payments from Medicare at 50.30% and private insurance at 49.70%. The Women’s Diagnostic Center shows payments from private insurance at 69%, Medicare at 26%, Medicaid at 3%, and self pay at 2% (BNET, 2007 & Newton Medical Center, 2007).

Health/Wellness Programs

The Fitness Forum offers a variety of programs relating to exercise, disease prevention, and nutrition. Professional physiologist and registered nurses are supported by the hospital’s registered dietician, physical therapist, and cardiologist. The Cardiac Rehabilitation Program is available for anyone who has experienced a heart attack within and the last 12 months and recipients of angioplasty, coronary artery bypass graph, and heart valve surgery. The Risk Factor Program is for clients with risk factors for heart disease, high blood pressure, diabetes, high cholesterol, and smoking. The Healthy Senior Adult Exercise Program offers a variety of exercise equipment, body fat analysis, EKG monitoring, blood pressure measurements, and nutrition counseling. The Women’s Diagnostic Center incorporates women health services into one facility offering advanced diagnostic testing and health education. The ImageChecker System is the first FDA approved computer-aided detection system and full-view diagnostic mammogram designed to reduce the number of false negative readings. Stereotactic Breast Biopsy determines whether an abnormality seen on a mammogram is benign. Bone Densitometry is the most accurate way to diagnose early stages of osteoporosis (Newton Medical Center, 2007).

Fitness Forum
YTD Budget 2006 YTD Actual
2006 YTD Budget
2007 YTD
Actual
2007
Units of service 18,000 13,711 9,725 11,000
Revenues 284,901 219,350 137,831 195,844
Expenses 262,000 262,320 176,883 177,324
Contribution to overhead 22,301 42,970 39,152 18,520

Women’s Diagnostic Center
YTD Budget
2007 YTD Actual
2006 YTD Budget
2007 YTD
Actual
2007
Units of service 17,600 18,676 13,045 12,989
Revenues 2,097,359 2,126,202 1,585,030 1,673,555
Expenses 787,800 826,430 610,190 558,917
Contribution to overhead 1,309,559 1,299,772 974,840 1,114,638

Key Financial Management Principles

Policies and practices related to financial management effectively communicate Newton Medical Center’s financial position to both internal and external stakeholders. Financial management ensures accountability and guides the decision-making process in support of organizational goals and objectives. The overriding goals of financial management are profitability and viability. Healthcare organizations generate profits to expand services and acquire new technologies to ensure that quality care is accessible; whether for profit or non-profit. Viability is a crucial goal of financial management and is measured in terms of liquidity and solvency. “Liquidity is a measure of the amount of cash or convertible to cash assets an organization has to meet obligations in the near-term. Solvency is the same concept from a long-term perspective” (Finkler & Ward, 2006). Newton Medical Center can reach the overriding goals of profitability and viability with three key financial management principles; accountability, budgeting, and functions.

Accountability

Newton Medical Center has in place policy and procedures to monitor and record assets received, held, and expended. Accountability requires checks and balances of the various financial systems within the facility and is accomplished through separation of financial duties. Newton Medical Center’s finance department consists of a Chief Financial Officer, Controller, an accounting manager, and a cost accountant. Financial reports created by the finance department are presented to the Board of Directors of Newton Medical Center. The Board of Directors is made up of various leaders from the community, including bankers, business owners, a judge, and a non- practicing physician (Newton Medical Center, 2007).

Budgeting

“A budget is a detailed plan specifying how resources are acquired and used over a specific period” (Meerscheidt, et al., 2007). Budgets must be submitted for review and approval. Newton Medical Center plans for a balanced budget, as a non-profit organization. The Board of Directors and top management officials are made aware of the expected outcome and participate in developing a plan to restore the budget should budget deficits occur. Newton Medical Center ensures endowment funds are budgeted separately and expended according to the wishes of the benefactor (Newton Medical Center, 2007).

Functions

The finance department of Newton Medical Center is responsible for handling the financial activities of the organization. The CFO has final approval of all financial activities of the organization. Organizational financial policies must conform to generally accepted accounting principles (GAAP). The function of the Board of Directors of Newton Medical Center is to set compensation for the hospital’s executives and other key personnel. Compensation must be aligned with industry standards. The Board of Directors must also read and interpret financial statements for the organization (Newton Medical Center, 2007).

Budget Process Steps

The financials for every department for the last 12 months and the contributions to overhead are reviewed. Departments not meeting goals are analyzed. Units of services for possible trends occurring over the last year are reviewed. The appropriate increases for each department are based on trends or previous year’s increases and budgeted. A request is made from department manager of any FTE’s or capital equipment. The request is submitted to administration with appropriate supporting documents. Reasons for the department purchasing new items or replacing items are presented to administration. A cost analysis is provided detailing if the item creates revenue in the department. Requests are reviewed by administration before submitting to the Board of Directors. Capital budgeting is submitted to the Board of Directors during the November board meeting. Departmental budgets are prepared by the accounting staff with capital items and newly adjusted FTE numbers. Preliminary budgets are submitted to departmental managers for review. Fiscal staff discusses any budget changes before final budget numbers are submitted to administration. The final budget is submitted to the Board of Directors at the December board meeting (Newton Medical Center, 2007).

Evaluation of Balance Sheet
Newton Medical Center
Balance Sheet
As of December 31, 2007

LIABILITIES &
ASSETS NET ASSETS
Liabilities
Current Assets $13,376,461 Current liabilities $9,249,250
Long-term liabilities 27988208
Fixed Assets $44,504,566 Total Liabilities $37,237,458
Net Assets
Investments $18,571,151 Unrestricted $37,266,489
Temporarily Restricted $0
Intangibles 550330 Permanently Restricted 0
Total Net Assets $37,266,489

TOTAL LIABILITIES &
TOTAL ASSETS $77,002,508 NET ASSETS $74,503,947

The Balance Sheet for Newton Medical Center shows the 2007 year-end financial position of the facility. The first subgroup of the balance sheet is the facility’s assets which are broken down into several groups. The current assets provide information about the liquidity of Newton Medical Center. The fixed assets represent the facilities property, plant and equipment. The investments represent the property, plant and equipment and intangibles. The total assets for Newton Medical Center as of December 31, 2007 equal $77,002,508. The second subgroup lists the facilities current liabilities due within a year and long-term liabilities due after one year. The total liabilities for Newton Medical Center equal $37,237,458. The third subgroup is net assets representing a portion of the total assets owned by the facility. Net assets are divided into three categories unrestricted, temporarily restricted and permanently restricted. The sum of these categories is equal $37,266,489. Newton Medical Center’s total liabilities and net assets equal $74,503,947 (Newton Medical Center, 2007).

Evaluation of Statement of Operations
Newton Medical
Statement of Operations
For the Years Ending December 31, 2007 and December 31, 2006
2007 2006
Revenues
Net Patient Services Revenue $70,470,621 $64,424,917
Premium Revenue 152,001 101,152
Other Operating Revenue 5,727,892 5,170,165
Total Revenues from Operations $76,350,514 $69,696,234
Operating Expenses
Salaries and Benefits $33,562,412 $31,876,286
Medical Supplies and Drugs 10471738 10537889
Purchases Services 7,879,803 6,799,294
Utilities 1,245,504 1,113,033
Depreciation 5,742,715 5,302,031
Interest 1,163,206 1,137,212
Provision for Bad Debts 11,442,939 10,315,763
Other Operating Expenses 2,627,734 2,471,985
Total Expenses from Operations 74,136,051 69,553,493

Excess of Revenues Over Expenses $2,214,463 $142,741

Unrestricted Contributions $208,334 $310,542
Transfers to Parent $0 $0
Other Non-Operating Changes $0 $0

Increase/(Decrease) in Unrestricted Net Assets 2,422,797 453,283

The composition of the statement of operations encompasses three sections; revenues, operating expenses, and non-operating items. The revenue section consists of net patient services revenue, premium revenue, and other operating revenue. The sum of these items equal total revenues from operations. The operating expenses section consists of salaries and benefits, medical supplies and drugs, purchases services, utilities, depreciation, interest, provision for bad debts, and other operating expenses. The sum of these items equal total expenses from operations. The excess of revenues is derived from subtracting the expenses from the revenues. Non-operating items basically consist of unrestricted contributions. Increases or decreases in unrestricted net assets are derived from adding the unrestricted contributions to the excess of revenues over expenses. The statement shows an increase in revenues of $6,654,280 and expenses of $4,602,558 from the year 2006 to 2007. An excess of revenues over expenses exist in both years because revenues are higher than expenses. The excess of revenues increased by $2,071,722 from the year 2006 to 2007. The unrestricted contributions decreased by $102,208; however, the bottom line shows an increase in unrestricted net assets due to the excess of revenues (Newton Medical Center, 2007).

Financial Picture

Newton Medical Center is able to financially improve excess of revenue over expenses; creating more income while holding expenses constant from 2006 to 2007. Managing resources around the facility allows the organization to increase profits. The organization increased revenues by almost $6.1 million dollars. The improvements in net revenue, which rose approximately 10%, help offset the increase in salaries and bad debt. The profits increased from 2006 to 2007 by over $2.1 million dollars. Financially, the organization closes the year with a profit, which is the largest profit margin in the last five fiscal years. The profit allows for renovations in the lab and emergency room, capital equipment purchases, and salary increases in the coming fiscal year. Newton Medical Center also has positive working capital showing the facility is able to pay off the short-term liabilities (Newton Medical Center, 2007).
Conclusion

Newton Medical Center shows promise despite the complexities in the United States (U.S.) healthcare system. The consumer payment system is constantly changing the burden of the payers. FWA compliance prevents increased healthcare costs. Health and wellness programs allow additional income to the facility. The organization must uphold key financial management principles to ensure proper planning, budgeting, monitoring, evaluation, and analysis. The budget keeps the financial process and responsibilities in place. The balance sheet gives insight to Newton Medical Center’s financial position along with displaying what the facility owes and owns. The working capital ratio shows the organization can pay off short-term liabilities. The statement of operations reveals an excess in revenues for the years 2006 and 2007; ultimately showing a profit. The financial analysis of Newton Medical Center proves the organization to be profitable and sustainable (Finkler & Ward, 2006 & Newton Medical Center, 2007).

References

All About Bleeding. (2005). Retrieved November 24, 2007 from allaboutbleeding.com/vwd_and_you/view.asp?

BNET Research Center. (2007). FindArticles. Retrieved November 21, 2007 from
findarticles.com/p/articles/mi_m3257/is_12_59/ai_n15980892-32k

Consultative Group to Assist the Poorest. (n.d.). Financial Analysis. Retrieved on
December 6, 2007, from www.cgap.org

Finkler, S. A. & Ward, D. M. (2006). Accounting fundamentals for health care
management. Sudbury. MA: Jones and Bartlett.
Retrieved on November 22, 2007, from eBook Collection www.ecampus.phoenix.edu

MANP (n.d.). Financial management. Retrieved November 21, 2007 from http://www.nonprofitmaine.org/pp_financial.asp

Meerscheidt, A., Bagley, W., Howells, V., and Yuhas, J. (2007). Microsoft solutions for management: Financial management. Retrieved November 21, 2007 from http://www.microsoft.com/technet/solutionaccelerators/cits/mo/smf/smffin...

Minnesota Life. (2005). Glossary. Retrieved November 21, 2007 from
www.minnesotamutal.com/about/glossarypages/glossary.asp

Newton Medical Center. (2007). Newton’s financials. Retrieved on December 13, 2007,
from www.newtonmedical.com

Newton Medical Center. (2007). The Fitness Forum. Retrieved on
November 22, 2007, from www.newtonmedical.com

Newton Medical Center. (2007). The history of Newton Medical Center. Retrieved on
November 22, 2007, from www.newtonmedical.com

Newton Medical Center. (2007). The Women’s Diagnostic Center. Retrieved on
November 22, 2007, from www.newtonmedical.com