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East Adams Rural Hospital District,
Measures of Profitability, Liquidity, and Solvency,
2002 - 2010


What do I know?
--Michel Eyquem de Montaigne, Essais

This page still--

This page still Under Construction

--so check back from time to time.


The Source

East Adams Rural Hospital (EARH) regularly reports its financial status to the State, through several reports required by law. These annual financial reports are available on the internet from the Washington State Department of Health, and are the source data for the measures reported below.

A clear and useful explanation of hospital finances can be found in The Community Leader's Guide to Hospital Finance (a PDF file), available on line from The Access Project. Much information about the measures here comes from that publication.


The Measures

The various measures are fairly simple ratios, and are conventional standards for evaluating hospital financial status. They fall into three broad categories, being measures of:

  • Profitability: How much profit has the hospital made? Is the hospital rolling in dough or just breaking even and covering its costs?

  • Liquidity: The hospital's ability to meet its short-term obligations. Does the hospital have enough cash to pay its bills?

  • Solvency: The hospital's ability to meet its long-term obligations.

Below, the measures for each category are explained.


Profitability

Total Margin

The "Total Margin" is defined as:

Net Revenue / Total Revenue

The Total Margin measures the percentage of revenues collected from both primary and peripheral activities that is kept as profit. For example, a 5% Total Margin means that for every $100 collected as revenue, $5 is kept as profit.

This is probably the single most important financial-performance measure for a rural hospital receiving regular and relatively substantial tax revenue.


Operating Margin

The "Operating Margin" is defined as:

Net Operating Revenue / Total Operating Revenue

The Operating Margin measures the percentage of revenues collected from primary activities that is kept as profit. For example, a 3% Operating Margin means that for every $100 collected of patient revenues, the hospital keeps $3 as profit. Operating Margins can also easily (especially in a tax-funded rural hospital) be negative; for example, an Operating Margin of -10% means that for every $100 collected of patient revenues, the hospital loses $10 of its own money.

This is a very tricky measure, because industry experts do not at all agree on what elements constitute "operating" income and expenses, and the way the numbers are reckoned will usually have a huge effect on the calculated margin. The three primary methods are these:

  • Patient Care Only (PC): only revenue and expenses directly connected to actual patient care are used. The idea is that patient care is what the hospital is in existence to provide.

  • Patient Care and Other Operations (PCO): besides patient-care direct matters, this method includes medically related other income (and expenses), for example an in-house pharmacy (which, of course, EARH does not have). The idea is that this income would not exist if the hospital were not providing patient care, and so is valid "operating income".

  • Patient Care, Other Operations, and Government Appropriations (PCOG): for many hospitals, including EARH, tax revenue is a huge part of the financial picture (EARH could not operate without tax revenue). The idea is again that if the hospital were not providing patient care, there would be not tax revenue to assist it, and so it should also be considered "operating income".

EARH does not include tax revenue but apparently does include some relatively minor non-patient income, so it seems to follow the PCO model for reckoning Operating Margin. ("Seems" because the Operating Margins reported on the monthly Financial Statement sheets do not seem to exactly follow that model, and it is hard to see precisely what they are calculated from.)

Calculating this ratio is further complicated by a recent (early 2011) decision by the Financial Accounting Standards Board to reclassify "Provision For Bad Debts" from an operating expense to a deduction from revenue. The total of debits is unaffected, but the ratio is affected (for example, for 2010 using the PCO method, it changes from -7.35% to -7.88%); thus, for years before 2011, the Operating Margin will not be comparable to that for years after 2010.

It is probably best to evaluate a small rural hospital with the clear and definite "Total Margin" criterion.


Markup Ratio

The "Markup Ratio" is defined as:

(Gross Patient-Service Revenue + Other Operating Revenue) / Total Operating Expense

The Markup Ratio measures the percentage by which charges are increased above cost. For example, if the hospital’s cost for providing a particular service was $10,000 and they charged $15,000 for the service, they would have a Markup Ratio of 1.5.

It is important to bear in mind that hospitals have differing--often, sharply differing--markup ratios for different payors. For example, rural hospitals mark up billings to uninsured patients by an average of 2.42 times what they mark up billings to Medicare. The Markup Ratio is thus a hard measure to use if comparing hospitals, because it will depend strongly on the exact mix of Medicare, Medicaid, privately insured, and uninsured patients using a given hospital.

Markup ratios for most payors, whether governmental or private insurance firms, are typically set by negotiations between the hospital and that payor (or, for governmental payors, there may be no negotiations but rather an imposed schedule). Only the uninsured have no negotiating power, which is why, as noted above, they are typically marked up much higher than any other payors.


Deductible Ratio

The "Deductible Ratio" is defined as:

Contractual Allowance / Gross Patient Service Revenue

The Deductible Ratio measures the percentage discount that third-party payers get, on average, from listed charges. For example, a 25% ratio would mean that the average third-party payer received a 25% discount off listed charges.

The same comments apply here as for the Markup Ratio (to which this will be closely related).


Liquidity

Current Ratio

The "Current Ratio" is defined as:

Current Assets / Current Liabilities

The Current Ratio measures how many times the hospital is able to meet its short-term obligations with short-term resources. A ratio of 2.00 would show that the hospital could pay its current liabilities twice over.


Days Cash on Hand: Short-Term Sources Only

"Days Cash on Hand: Short-Term Sources Only" is defined as:

Current Cash and Investments / (Other Operating Expenses/365)

Days Cash on Hand: Short-Term Sources Only measures the number of days the hospital could continue to operate without collecting any additional cash. For example, a ratio of 150 would mean that the hospital could stop collecting revenues today and be able to continue operations for an additional 150 days before running out of cash.

What constitutes a healthy figure varies with the type of hospital; for-profits and non-profits especially are different, with non-profits expected to have considerably higher day counts. Typical figures will be 150 to 200 days, but, again, it is hard to compare hospitals; this measure is more valuable for tracking one hospital through time.


Days Cash on Hand: with Board-Designated Assets

"Days Cash on Hand: with Board-Designated Assets" is defined as:

(Current Cash and Investments + Board-Designated Assets) / (Other Operating Expenses/365)

Days Cash on Hand: with Board-Designated Assets considers all sources of unrestricted cash available for operations, and illustrates the number of days the hospital could continue to operate without collecting any additional cash.

As with the short-term days reckoning, what constitutes a healthy figure varies with the type of hospital; this measure, too, is more valuable for tracking one hospital through time than for comparing hospitals.


Solvency

Equity Financing

"Equity Financing" is defined as:

Unrestricted Net Assets / Total Unrestricted Assets

The Equity Financing ratio measures how much of the hospital’s assets were paid for using equity, and how much of its assets were paid for using debt. For example, a ratio of 60% would indicate that the hospital financed 60% of its assets with equity, which means the remaining 40% were paid for by debt.


Cash Flow to Total Debt

"Cash Flow to Total Debt" is defined as:

(Net Revenue + Depreciation) / (Current Liabilities + Noncurrent Liabilities)

The Cash Flow to Total Debt ratio measures financial risk: Given the hospital's source of total funds for the current year, how much of their total debt could they pay off this year? For example, a ratio of 30% means that a hospital would be able to repay a third of their total debt in the current year, if it used all of their available funds.


The Numbers

Processing the actual numbers is a work in progress. It is complicated by the fact that various budget items are not always called by the same name by different sources, so it's hard to be sure without extensive research what a given entry might be called on the State's mandatory forms. Appearing below is what is definite so far.


East Adams Rural Hospital District, Annual Financial Data:
Presented in Actual Dollars

The data in the Table below are from the Washington State Department of Health web site pages, specifically
the Center For Health Statistics Hospital Data, Community Hospital Utilization and Financial Data pages.

ITEMS ↓ 2010 2009 2008 2007 2006 2005 2004 2003 2002
Total Margin: + 3.37% + 1.78% + 4.46% + 9.93% + 6.12% + 8.95% +12.98% + 9.65% +16.50%
Operating Margin:
 PC model
 PCO model
 PCOG model
(see Note 1)
- 8.14%
- 7.35%
+ 3.15%
(see Note 2)
+ %
+ %
+ %
+ %
+ %
+ %
+ %
+ %
+ %
+ %
+ %
+ %
+ %
+ %
+ %
+ %
+ %
+ %
+ %
+ %
+ %
+ %
+ %
+ %
ITEMS ↑ 2010 2009 2008 2007 2006 2005 2004 2003 2002
Note 1: PC = patient-care only operations only; PCO = patient care & other operating income; PCOG = all operating income & tax revenue.
Note 2: Calculated as in prior years (Provision For Bad Debt considered an operating expense, not a deduction from revenue).






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