Arcadia Hospital Budget Overview

Current Ratio 2005-2006 (in millions) 2005 Assets = 17900 2006 Assets = 18055 2005 Liabilities = 10000 2006 Liabilities = 10100 CR 2005 = .179 CR 2006 = 1.79 Average Two Year Current Ratio = 1.79

Inventory Turnover (in millions) 800 for each year, meaning no new inventory was purchased that fit in category or exact amount was purchased to equal total In both years, inventory accounts for about 4.5% of total

Total Assets (in millions) Differences = <-345 >in cash Differences = +300 Accounts receivable Differences = +1000 Property Plant & Equipment Difference = +162155 between years

Value Calculations for Arcadia Company appears marginally stable, net decrease in cash of 445 Assets growing, A/R growing, some concern with negative cash Current liabilities under 20% LT Liabilities management, although mortgage was not paid down at all between 2005-2006 Net income 8.18% for 2006 National average in net income seems to be trending downward and is just under 6% so Arcadia is a bit over that range Medical costs are so high that operating margins have declined since 2000 from 13% to -5% on average Source:http://www.costreportdata.com/HFM-MCMargins_DEC07.pdf

Rule of Thumb for Valuation Typically 1.5 times annual revenue Arcardia worth then 590-600 million with following caveats Wages and benefits are at 52% Mortgage has not been paid down, need a current assessment Need to review plan for controlling cashflow Dr. David Marcinko, “Rules of Thumb Valuation Benchmarks, March 19, 2009 cited in: http://healthcarefinancials.wordpress.com/2008/03/19/rules-of-thumb%E2%80%9D-valuation-benchmarks/

Adjusted Book Value High-End Value For Arcardia = $600 million Reduce asking price by: Current Liabilities, adjusted LT liabilities (less mortgage) Reassess mortgage value to see current market value Estimated adjusted book value = $542 million See article on Market value versus book value by John Garger, cited in:http://www.brighthub.com/office/finance/articles/19317.aspx

Values between '05-'06 Essentially same value Some asset differences Cash flow worsens in '06 Are receivables out of line or are costs and HMO discounts causing this? National average is ok – but what strategic direction is necessary?

Revenue Variances (in millions) Net income down 35% or $155 million Accounts receivable would cover and add additional $145 million to balance sheet Equipment and bond payments placed '06 in partial jeopardy, which may have been a strategic decision Question '07 strategic plan

Concerns Typically, as much as 6% of an average hospital's revenue is never recorded due to denials or underpays. For Arcardia, this would amount to as much as $36 million dollars, which would reduce negative cash flow by almost 11% See article on revenue loss in: http://www.claimtrust.com/problems/revenue-loss.html

Liquidity and Prospectus Typical liquidity ratio is 1.5, Arcardia is 1.8 Lower than 1 = negative working capital, higher than 3-4 means poor use of cash Arcadia is healthy within the industry standards, but needs a cash flow plan for next fiscal years See Current Ratio and analyzing a balance sheet in: http://beginnersinvest.about.com/cs/investinglessons/l/blles3currat.htm

Quick Test or Liquidity Ratio (in millions) Current assets less inventory = quick assets = for 2006 = 6100 This could theoretically be turned into immediate cash in short-medium turn Divide by current liabilities = 1.90 Must be greater than 1 or companies cannot pay their liabilities Arcadia is about average for industry See the discussion in: http://www.allbusiness.com/glossaries/acid-test-ratio/4943167-1.html

Working Capital Issues (in millions) Working Capital of <-345> divided by total sales of 590 = <-.59> Thus, Arcardia may have some issues with paying liabilities on time unless cash flow issue can be solved This ratio tells us that for every dollar of sales, there is now a negative cash flow of about 6% See discussion on working capital in: http://beginnersinvest.about.com/cs/investinglessons/l/blles3wrkdol.htm

Other considerations... Balance sheet numbers are a key, but not the future value or potential of Arcadia Numerous issues with the new Obama Administration would factor into an Arcadia plan No marketing or structural plan was attached, clearly needed Aging report on A/R and A/P would be helpful as well

New Budget Considerations What is Arcadia's strategy What is being done to collect A/R Are costs in line? Department by department line item. Is there money being unbilled that is recoverable? What are realistic revenue projections (2006 was over projected by $50 million

Wage Considerations For Budget (in millions) Wages and benefits totaled 350 for 2006, or over 50% of operating costs Patient revenues were 600 Cost/visit is unknown, but we know that for every dollar Arcadia bills, $.51 goes to salaries Based on industry standards, this is high Solution – Benchmarking and adjustment of costs, revisit fee sheets and update billing. See the discussion on Benchmarking to improve Hospital Financial indicators in: http://www.allbusiness.com/health-care-social-assistance/546809-1.html

Conclusion It appears Arcadia is in a growth phase but hitting recessionary issues Top management needs to be concerned about cash-flow Strategic marketing necessary – appears that if more patients could be seen using identical resources, this would improve ratios.

References “Analyzing a Balance Sheet,” (n.d.) About.com. Cited in: http://beginnersinvest.about.com/cs/investinglessons/l/blles3currat.htm “Benchmarking Improves Hospital Financial Indicators,” (May 1, 2000). Healthcare Financial Management. Cited in: http://www.allbusiness.com/health-care-social- assistance/546809-1.html Garger, John. (December 15, 2008). “Market Value Versus Book Value of Liabilities: Financial Distress.” Bright Hub. Cited in: http://www.brighthub.com/office/finance/articles/19317.aspx Marcinko, David E. M.D., (March 19, 2008). “Rules of Thumb Valuation Benchmarks.” Medicat Executive-Post. Cited inhttp://healthcarefinancials.wordpress.com/2008/03/19/rules-of-thumb%E2%80%9D- valuation-benchmarks/: “Revenue Loss.” (2009). ClaimTrust. Cited in: http://www.claimtrust.com/problems/revenue-loss.html Schuhmann, Thomas. (December 2007). “Medicare Margins Trending Downward.” Healthcare Financial Management Association. Cited in: http://www.costreportdata.com/HFM-MCMargins_DEC07.pdf