Analyze 2010’s financial statements using ratio analysis and identify

Analyze 2010’s financial statements using ratio analysis and identify strengths, weaknesses, and recommendations for improvement.

It is December 2010, and you have just accepted the CFO position at Bobcat Integrated
Delivery System (IDS). You will be reporting to Mr. Salter, Bobcat IDS chief executive
officer, a retired school teacher who was hired last year. Also reporting to Mr. Salter are Mr.
Wannabe, Bobcat IDS chief operating officer; Dr. Spok, Bobcat IDS medical director; and
Ms. Patty Care, Bobcat IDS director of nursing. When announcing your appointment, Mr.
Salter stated that your primary objective in the coming year (2011) would be to reverse the
ominous financial trend that began in 2009 with an operating loss and continued in 2010.
Previous operating losses were funded with investment income (however, investment income
was only $200,000 in 2010 due to weakening market conditions). Moreover, your board
recently passed a resolution discontinuing that practice and restricting investment income to
capital expenditures.
Bobcat IDS is a not-for-profit corporation and includes a 120-bed acute care hospital, a 25bed skilled nursing facility (SNF), a 15-bed rehab facility, a home healthcare agency, and an
outpatient clinic. The hospital, Bobcat Community Hospital (BCH), is the only hospital in
Bobcat, a rural community of 50,000 in your state.
In order to acquire background information, you decide to meet with each member of the
executive team first, then selected members of senior management.MEETING WITH DR. SPOK
Dr. Spok, hospital medical director, told you:
Most doctors have been on the medical staff for at least ten years. There is little loyalty to the
hospital, and most doctors also have admitting privileges at County Hospital, a newer public
hospital with better facilities 30 miles away. While it is a hassle for the doctors to drive to
County Hospital to make rounds, there are few good reasons for the doctors to admit their
patients to Bobcat Community Hospital. County Hospital has a hospitalist and pays
physicians large amounts of money for menial service assignments like committee work (a
practice that Bobcat has refused to participate in).

MEETING WITH MR. SALTER
Mr. Salter, chief executive officer, stated:
I just don’t understand why we are losing money. I spent a considerable amount of time
recruiting new doctors while keeping the existing doctors happy. The new, younger doctors
just don’t seem to have a sense of loyalty to Bobcat Community Hospital. Furthermore, I’ve
tried to establish a “family atmosphere” for our employees, which stresses getting along well
with others in return for job security. Everyone seems happy. Everyone except Ms. Fi Nance
Myway, whom you’ll be replacing. She and I both started January 2009 and she seemed
increasingly frustrated with the way I do things here—she just didn’t fit in. I tried to
accommodate her by implementing some of her recommendations, even though they were
against my better judgment—like charging visitors for parking [generating $100,000 in other

operating revenue for 2010]. And when I announced that I was bringing in more business to
the hospital by entering into a two-year capitated managed care agreement with the city (it
expires this month)—we get $250 per month per family for taking care of the 300 city
employees and their families, whether they’re sick or not—Ms. Myway threw a fit at an
executive team meeting. She claimed that my decisions were driving Bobcat IDS deeper into
the red. I finally had to show Ms. Myway the highway for insubordination. That happened in
November 2010.

MEETING WITH MR. OPERATOR
Mr. Operator, chief operating officer and a recent graduate from a program in
healthcare administration, expressed the following concerns regarding the hospital:
It’s easy to understand how we lost money last year—Mr. Salter just won’t say “no” to the
doctors…or the nurses, for that matter.
Our revenue is down for a variety of reasons and our expenses continue to increase. I don’t
know why the board ever picked a school teacher to run a healthcare system.

MEETING WITH MS. PINCHER
Ms. Penny Pincher, Summersville IDS controller, in answer to your question regarding
last year’s loss, believes the following:
While acute care days are flat and SNF and rehab days and outpatient visits are up, our real
financial problems involve our patient mix by financial class—commercial and self-pay
continue to decline and fixed payment and capitation continue to increase, and our board
won’t approve more than a 2 percent rate increase for 2010 (which affects collections for
only commercial and managed care with discount—you need to make assumptions regarding
Medicare and Medicaid collections).

2010 Collections/Discharge

MEETING WITH MS. CARE
Ms. Patty Care, director of nursing, seeks your support in the following proposal:
While our financial loss is serious, most of it is attributable to low rates—we need to increase
our rates to reflect our quality services. Our nurses are overworked and underpaid. I’ve been
working on two solutions that I would like your support on. First, I believe strongly in
primary care nursing and as a result, 90 percent of the nursing staff is RNs. RNs can perform
more tasks than LPNs and nursing assistants, and therefore, are more efficient. This can be
further justified by the acuity of our patients. Using the DRG scale as a severity index, our
patients are sicker than those in the average hospital. However, I am having some difficulty
getting the RNs to administer meds, empty bed pans, and feed patients. Therefore, I have
developed a total quality management (TQM) program designed to convince the RNs that all
their tasks are important. All RNs are required to attend five hours of TQM training each
week. Even though patient days are down, I would like to hire ten more RNs to help cover
the floors when the other RNs are in training. In order to recruit these RNs in light of the
nursing shortage, we need to increase their average hourly rate to $50, which is competitive
with County Hospital (see Table VI-A). This, of course, would be in addition to the cost-ofliving raises already announced by the personnel director (Assignment #17 is to calculate the
possible nurses’ compensation packages). I also would like for you to include a doctorally
prepared entry level nurse in our strategic plan for ten years from now. (If physical therapy
can require a doctorate for entry level, so should we!)

MEETING WITH MS. PERSONAL

Ms. Personal, personnel director, reluctantly admits the following to you.
Hospital practice in the past has been to give the employees a cost-of-living raise equal to the
previous year’s percentage increase in the Consumer Price Index. Also, historically, we have
allocated 5 percent of total wages to a merit pool to be awarded to meritorious employees
based on their annual evaluations. Because Mr. Salter treats the employees like family,
virtually everyone gets the raise. Because of shortages in nursing, I am recommending a
market raise of 3 percent, in addition to the above raises, to keep us competitive.
Here is a wage comparison to the facilities that we compete with for new hires (see Table VIA). Mr. Salter asked us not to announce raises until your financial analysis is complete. In the
event we can’t give the expected raises, I need an explanation from you giving the reason
(Assignment #18).

MEETING WITH MR. MATERIALS
Mr. Materials, materials manager, reports the following:
I am projecting a 5 percent increase in supply and food prices for 2011 and a 10 percent
increase in drug prices. All other prices should remain constant.

TABLE I:

Bobcat IDS Balance Sheet as of December 31, 2009: Assets

TABLE II:
2010

Bobcat IDS Actual Expenses Through December 31,

TABLE IV-A:

Discharges

TABLE IV-B:

Percentage of Discharges by Payer

TABLE IV-C:

2010 Charges per Discharge

TABLE V:

Radiology Department Procedures

TABLE VI-A:
Salary Survey of Area Hospitals Average Hourly
Rates (without benefits), December 2010

TABLE VI-B:

Bobcat Staffing as of December 31, 2010

*
**

contract
90 percent RNs, 10 percent clerks

TABLE VII*: Bobcat City and County Ad Valorem/Property Tax
Schedule per $100 Assessed Value

*
This table is used only if your state requires non-profit hospitals to provide
community benefits in relation to their potential state and local tax liabilities.

13.
For 2011, develop a statistical budget; then develop a revenue budget (using a financial
model, determine whether to increase rates and if so, how much) and an expense budget in
Statement of Operations format including detailed footnotes explaining any changes in the
numbers.
I would like to see at least four different expense scenarios:
i.
maintain expenses at 2010 levels after adjusting for volumes and mandated expenditures
identified in earlier steps;
ii.
maintain expenses at 2010 levels after adjusting for volumes and mandated expenditures
identified in earlier steps and honoring all requests (i.e., raises, additional personnel, etc.);
iii.
cut expenses (from expense scenario #1) in order to break even in 2011; and
iv.
cut expenses (from expense scenario #1) in order to break even in 2011 and recover FY
2010 losses.