Financial Analysis of Alternative Health Care Firms Class 7, 2/21/02 Long-Term-Care Facilities and Nursing Homes Medical Groups Health Plans

Long-Term-Care Facilities and Nursing Homes In 1997 there were 16,700 Nursing Homes in the US reporting revenues of $82.8 billion, 38% paid by private individuals or insurers, 62% paid by either the federal or state governments. Size of the industry heavily regulated by states Dependent on government policy governing payments for long-term-care. 55% are members of national chains, 45% independent.

Notable characteristics of LTC Financials 55% of expenditures are for wages, salaries and benefits paid to employees. How depreciation is listed under other expenses. Accounting for the contributions to ‘Entrance fee funds’ that are required for membership in a CCRC. Illustrating the accounting and profitability of CCRCs.

Medical Groups In 1997, medical practices reported revenues of $217.6 billion 66% paid by private sources and 34% by governments. Tendency for physicians to join larger medical groups. Physician contacts per person are increasing at all age categories. Population aging contributes to increased utilization of physician services.

Alignment of Medical Groups With other medical groups –By joining or forming an IPA –By merging with other Medical Groups With hospitals –By participating in a hospital-sponsored PHO –By selling medical practice to a MSO With health plans –By contracting directly with a HMO health plan With physician practice management firms –By selling medical practice to a for-profit PPM firm.

Notable characteristics of Medical Group Financials The separation of expenses into two categories: Operating expenses and physician expenses. The likelihood that net profits of a hospital owned Medical Group - perhaps a MSO- would expect to run at a loss. The implications of large negative balance in a medical groups Retained Earnings accounts.

Health Plans Variety of incorporated firms licensed to offer health insurance plans. –Commercial –Public service corporations –Corporations licensed by feds to offer self insure health plans they offer to employees Kinds of Health plans governments license these firms to sell. –Indemnity –Managed Care –Self-insured

Trends in Health Plans Increase in the cost of health insurance plans Increase in the population not covered by health insurance Increase in health plans that offer POS option Increase in the popularity of health plans built around PPO as opposed to HMO arrangements.

Hospital owned HMO Plan (Health Central or Health Guard) 75% of assets are current assets 8% of assets are property and equipment. Importance of managing cash. Incurred but not reported claims (IBNR) –Reported to be the major accounting challenge faced by managed care plans. Considered a major factor in the bankruptcy of Harvard Pilgrim Health Care Plan.