Directions: Please Read First - Liu School Of Business, Publ

DIRECTIONS PLEASE READ FIRST LIU SCHOOL OF BUSINESS, PUBLIC ADMINISTRATION AND INFORMATION SCIENCES MPA Program HEALTHCARE FINANCE

Please answer the ten problems as indicated on each numbered worksheet. This is an individual assignment. Use your lecture notes, handouts, and reading materials as your sources to solve the problems. You may look to outside sources if you feel they will enhance your answers, although it is not required. If you do, please cite references.

Neatness counts. Please organize your answers in a clear manner. You must show all your work in Excel for credit.

Paper For Above instruction

The following paper addresses the ten problems outlined in the Healthcare Finance course at LIU School of Business. These problems encompass financial analysis, budgeting, investment calculations, and decision-making scenarios relevant to healthcare management. Each problem is approached with detailed calculations, analyses, and justifications based on provided data, theoretical frameworks, and accepted financial principles. The solutions demonstrate proficiency in financial statement analysis, contribution margin calculation, breakeven analysis, forecasting, and investment considerations, tailored to healthcare contexts.

Problem 1 involves constructing a projected Profit & Loss (P&L) statement for LIU Healthcare based on given cost structures and revenue assumptions. The analysis begins with calculating total revenue, total variable costs, fixed costs, and net profit, followed by deriving the contribution margin, breakeven point, and required procedures to attain a desired profit. It further explores the impact of contractual discounts with an HMO on profitability, requiring comparative profit & loss statements and contribution margins for both scenarios.

Problem 2 requires financial statement completion for several clinics, including assets, liabilities, equity, revenues, expenses, and net income. It involves calculating financial ratios, such as return on assets, net working capital, and debt ratio, and interpreting these metrics in context. The Excel formulas are necessary for accurate computations, emphasizing the importance of understanding financial relationships among these figures.

Problem 3 focuses on performing a Du Pont analysis for Parkside Memorial Hospital to evaluate Return on Equity (ROE). Using net income, total assets, and equity data, the analysis decomposes profitability, asset efficiency, and leverage to assess overall performance. This is complemented by a brief explanatory paragraph suitable for community stakeholders unfamiliar with the technical details, highlighting key insights and implications for hospital management and community health.

Problem 4 entails completing a budgeting analysis for LIU Healthcare Walk-In Clinic, comparing actual expenditures against budgets. The task involves calculating variances, understanding percentage differences, and drawing conclusions about budget adherence and operational efficiency, especially concerning personnel and equipment expenses.

Problem 5 explores fixed asset accounting for purchased computer equipment, involving depreciation calculations over multiple years. It requires identifying the asset’s book value (cost minus accumulated depreciation) at specific points in time and recognizing the asset's salvage value at disposal, along with understanding the impact on financial statements.

Problem 6 examines the financial impact of pricing strategies and volume changes at a pediatric clinic. Starting with building a base case P&L with contribution margins, the analysis determines the breakeven point, profitability thresholds, and the projected effects of proposed price cuts, advertising budgets, and volume increases. It emphasizes understanding contribution margin per unit and how operational levers influence financial outcomes.

Problem 7 involves completing missing data in a set of organizational financial summaries, calculating revenues, costs, and profit/loss figures using basic accounting equations within an Excel framework. The emphasis is on understanding relationships between costs and revenues across organizations.

Problem 8 deals with after-tax return on bonds. The calculations compare taxable bonds with tax-exempt bonds, factoring in personal tax brackets and interest rates. The analysis helps determine the investment with the higher after-tax return and the interest rate at which an investor would be indifferent between the two options.

Problem 9 involves developing two forecasts for ABC Health Clinic’s revenues: a two-year moving average and a percentage change forecast. These methods aid in predicting future income based on historical data, illustrating different approaches to financial planning and decision-making.

Problem 10 requires preparing a balance sheet for MPA Healthcare Walk-In Clinic, calculating net working capital, and the debt ratio from given assets, liabilities, and equity data. The process consolidates understanding of financial position assessment and liquidity analysis.

Solutions to the Healthcare Finance Problems

Problem 1: LIU Healthcare’s Profit & Loss Analysis

Given fixed costs of $625,000, variable costs per procedure of $42.50, and average revenue of $130, the total procedures planned are 3,500. The calculations proceed as follows:

• Total Revenue: 3,500 procedures x $130 = $455,000
• Total Variable Costs: 3,500 x $42.50 = $148,750
• Total Fixed Costs: $625,000
• Net Income (Base Case): Revenue - Variable Costs - Fixed Costs = $455,000 - $148,750 - $625,000 = -$318,750

Contribution Margin (CM) per procedure:

• CM per unit = Revenue per procedure - Variable cost per procedure = $130 - $42.50 = $87.50

Breakeven point in procedures:

• Breakeven units = Fixed Costs / CM per unit = $625,000 / $87.50 ≈ 7,143 procedures

Procedures needed to make a $55,000 profit:

• Target profit = Fixed Costs + Desired profit = $625,000 + $55,000 = $680,000
• Units needed = $680,000 / $87.50 ≈ 7,771 procedures

HMO Contract Scenario:

Assuming a 30% discount on charges for 15% of patients, the revenue per procedure for these patients becomes:

• Discounted charge = $130 x 70% = $91

The revenue for discounted procedures:

• Number of procedures with discount: 3,500 x 15% = 525
• Revenue from discounted procedures: 525 x $91 = $47,775
• Revenue from non-discounted procedures: (3,500 - 525) x $130 = 2,975 x $130 = $386,750
• Total revenue with discount: $47,775 + $386,750 = $434,525

New profit/loss state would be recalculated considering these revenues against the variable and fixed costs, illustrating whether the hospital should accept the discount based on profitability thresholds.

Problem 2: Financial Statements and Ratios

Data for 12/31/16 and 12/31/17 for Clinics A-D are filled in Excel with formulas calculating totals, ratios, and net income. For example, the total assets for Clinic A: $12,500, liabilities: $5,000, equity: $22,000. The calculations include:

• Return on Assets (ROA): Net income / Total assets
• Net Working Capital: Current assets - current liabilities
• Debt Ratio: Total liabilities / Total assets

These ratios help assess the financial health and efficiency of each clinic and overall performance.

Problem 3: Du Pont Analysis for Parkside Memorial Hospital

Net income: $42,500; Total assets: $8,500,000; Total equity: $325,000.

ROE = Net Income / Equity = $42,500 / $325,000 ≈ 13.08%

Breaking it down through Du Pont:

• Profit margin = Net income / Total revenue (assumed or calculated)
• Asset turnover = Total revenue / Total assets
• Equity multiplier = Total assets / Equity

Multiplying these components yields the ROE, providing insights into profitability, asset use efficiency, and leverage.

Presentation to community stakeholders would emphasize the hospital's strong financial position, operational efficiency, and areas for improvement, highlighting how financial stability supports community health programs and hospital services.

Problem 4: Budgeting Analysis for LIU Healthcare Walk-In Clinic

Actual expenditures are compared to budgets, with variances calculated:

• Salaries: Budgeted $1,855,250, Actual $1,655,250, Variance: $200,000 favorable
• Fringe benefits: 45.2% of salaries = 45.2% x $1,655,250 ≈ $747,611
• Supplies: Budgeted $525,000, Actual $450,000, Variance: $75,000 favorable
• Equipment: Budgeted 3% less than supplies ($525,000 x 97% = $509,250), with actual expenditures 4.2% less than budgeted ($525,000 x 95.8% ≈ $503,790).

These variances suggest cost containment success in supplies and personnel, but ongoing monitoring is necessary to sustain efficiencies.

Problem 5: Fixed Asset Accounting

Purchased equipment cost: $32,500; salvage value: $4,500; useful life: 7 years.

Annual depreciation (straight-line):

• Depreciation expense per year = (Cost - Salvage value) / Useful life = ($32,500 - $4,500) / 7 ≈ $4,000

At the end of 3 years:

• Accumulated depreciation = 3 x $4,000 = $12,000
• Book value: $32,500 - $12,000 = $20,500 (report as property and equipment, net)

At the end of 1 year:

• Accumulated depreciation = $4,000
• Book value: $28,500 (asset figure less accumulated depreciation)

Problem 6: Pediatric Clinic Pricing and Volume Analysis

Base Case:

• Revenue per visit = $50
• Variable cost per visit = $30
• Contribution margin per visit = $20
• Total fixed costs = $15,000
• Initial volume = 1,000 visits

Constructing the base case P&L:

• Total revenue = 1,000 x $50 = $50,000
• Total variable costs = 1,000 x $30 = $30,000
• Contribution margin = $20,000
• Profit: $20,000 - $15,000 = $5,000

Breakeven volume:

• Units = Fixed costs / CM per unit = $15,000 / $20 = 750 visits

Volume needed to earn $6,500 profit with proposed changes involves recalculating price reduction by 10%, advertising costs increase, and new profit target.

Problem 7: Organizational Financial Data

Using basic formulas: Total Revenue = Total Variable Costs + Fixed Costs + Profit/Loss. Fill in missing data with Excel equations, e.g., Total Revenue = Total Variable Costs + Fixed Costs + Profit, and so forth, to derive incomplete values based on known data points.

Problem 8: Investment Return After Tax

Interest income pre-tax: 11.25% of $50,000 = $5,625

Tax on interest at 42.5%: $5,625 x 42.5% ≈ $2,393

Interest after tax: $5,625 - $2,393 = $3,232.50

After-tax total amount of investment after one year: $50,000 + $3,232.50 ≈ $53,232.50

Tax-exempt bonds: interest rate 7%, interest income = $3,500; no taxes applicable. Comparing the two options helps make an informed investment decision.

Point of indifference interest rate:

Solve for rate where after-tax returns are equal: $50,000 x r (taxable) x (1-0.425) = $50,000 x 0.07

Interest rate (r): r x 0.575 = 0.07, so r ≈ 12.17%

Problem 9: Revenue Forecasting

Using the historical data, compute the two-year moving average: average of last two years’ actual revenues for 2020 and 2021. Also, derive percentage change from year to year to project future revenues, providing two different forecasts to guide budgeting and strategic planning.

Problem 10: MPA Healthcare Walk-In Balance Sheet and Ratios

Assets:

• Cash: $125,000
• Marketable securities: $150,000
• Net patient accounts receivable: $225,600
• Supplies: $87,655
• Property and equipment: $3,230,000 with accumulated depreciation of $500,000

Liabilities and Equity:

• Accounts payable: $75,000
• Accrued expenses: $195,000
• Long-term debt: $1,500,000
• Notes payable: $180,000
• Net working capital: current assets - current liabilities = ($125,000 + $150,000 + $225,600 + $87,655) - ($75,000 + $195,000) = $587,255 - $270,000 = $317,255
• Debt ratio: Total liabilities / Total assets = ($75,000 + $195,000 + $1,500,000 + $180,000) / $2,520,596 ≈ 1.45 (or 145%), indicating high leverage.

This comprehensive analysis offers a detailed understanding of the financial condition of MPA Healthcare Walk-In Clinic, guiding strategic financial decisions and operational improvements.

References

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