Healthcare Accounting

Due Diligence for a Healthcare Systems Merger

Riverside Healthcare Association, Incorporated is a Virginia-based healthcare systems operating several acute care hospitals primarily in eastern Virginia and two long term care facilities.   

Eastern Maine Healthcare Systems is also Maine-based healthcare provider operating acute care facilities and a variety of specialty-practice care centers in eastern Maine.

The Boards of Trustees for these two hospital systems are considering a merger. You have been asked to first respond to several questions about the financial implications of such a merger. In part 1, your task is to report or estimate the amounts requested. In part 2, you will be asked to use the answers provided in part 1,along with narrative information in the organizations’ reports to provide financial guidance to the trustees.   Although your job is not “to take sides,” you should disclose as much as the information provided allows you to.   

You may note that Eastern Maine Healthcare Systems ends its fiscal year on September 29 and 28 in 2012 and 2013 respectively. For the purposes of this analysis, this is not material and you may treat each organization’s reports as valid and reliable information about their year end condition.   

Part 1: Pure Accounting

1. For both organizations, what were their gains or losses from operations in 2012 and 2013?   

2. By what nominal dollar amount and what percentage did EMHS and Riverside’s operating margins (i.e. gains or losses from operations) change from year-end 2012 to year-end 2013?

3. What were the current ratios for EMHS and Riverside in 2013?

4. To what extent did net accounts receivable contribute to the current ratio for each organization in 2013? (i.e. estimate the current ratio without net accounts receivable and then compare this with your answer to #3).   

5. Using a 2 x 2 Table with years in the columns and organizations in the rows, estimate and report the solvency ratios for each organization in 2012 and 2013 respectively.

6. Riverside maintains a defined benefit pension and health insurance benefit for its employees and retirees. What happened to its obligation to pay for these benefits between year-end 2012 and year-end 2013. Please report your answer as a nominal dollar amount and as a percentage change in which the 2012 pension liability is the denominator for the proportion.   

7. What operating activity most negatively affected Riverside’s Net cash flow from operations in 2013. How much did this “Use of Cash” increase in nominal dollars and as a percentage of its 2012 amount?   

8. Again, use a 2x2 table to report each healthcare system’s provision for bad debt in 2012 and 2013.   

9. Now use another 2x2 table to report each healthcare system’s provision for bad debt as a percentage of total patient services revenues (you may define “total patient service revenues” in a footnote to the table.

10. Estimate Riverside’s depreciation expense as a percentage of its Land, Buildings, and Equipment Asset value (which is expressed as net of accumulated depreciation).

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1. Using your answer from question 1 in part 1, which healthcare system has a healthier operating margin based solely on the profit or loss?   When you look at the component revenues and expenses for each system, are there any expenses or revenues from either system that you would identify as a financial concern (e.g. a high level of uncollectable service fees)?

- Looking at 2013, EMHS has a healthier operating margin than that of Riverside; the former having an operating profit of $38.3Mn while the latter has an operating loss of $10.1Mn. In 2012, Riverside has a positive operating profit. One reason why it has incurred an operating loss in 2013 is a steep increase in ‘Services and Other’ and ‘Supplies’. It 2013, these expenses incurred a combined increase of $53.3Mn....

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