Finance

Term Project 1

Bri Weed Term Project HCA 341 May 6, 2014

Term Project 2 In the United States, the demographic age make up is changing very rapidly. It is projected in the year 2050, there will be 88.5 million people over the age of 65 or 20% of the population. This age wave will have a strain much of the nations resources especially the healthcare industry. However, sectors of the healthcare industry will begin to grow and become profitable. Skilled Nursing Facilities will almost have to double in size to accommodate the “Baby Boomers.” This financial case study will analysis whether it can be profitable to own and operate a skilled nursing facility or better not to get involved with this sector.

Cook County Health and Hospitals System, (CCHHS), is based in Illinois with most of the care being centered in Chicago and Cook County. The main hospital is the John H. Stroger Jr. Hospital located in the Medical District in Chicago, Near West Side. CCHHS also has sixteen Ambulatory and Community Healthcare clinic within their network. CCHHS has one of the largest trauma and burn units in the United States, treating about 5000 patients a year. This health system covers the entire spectrum of the healthcare ranging from Diabetes, Oncology to Family and Community Medicine and Language, Speech, Hearing, Occupation and Physical therapy. It is clear CCHHS has a market share in every sector of the healthcare industry, except post acute care.

Post-­‐Acute care is a special level of care not offered at acute-­‐care hospitals. These facilities are tailored to the individual goals of the patient. The setting depends on the intensity of care needed for the patient. It can range from Home health support to Assisted Living to skilled nursing facilities. As the population ages and more patients are diagnosis with chronic-­‐long term disease; skilled nursing facilities will have exponential amount

Term Project 3 growth. Skilled-­‐nursing facilities have the staff and equipment to provide skilled nursing medical management and therapy services to individuals on a 24-­‐hour basis. These patients do not require high-­‐intensity services, which are provided in the hospital. Skilled nursing facilities are relative large, there are 1.7 million bed and 16,100 nursing homes, this is an average of 106 beds per facility (CDC, 2004) An Break-­‐Even analysis will be used to determine if CCHHS is able to cover the expensive and make a profit. In this current scenario, we will be looking to see if entering the sector will be profitable or a drain on crucial resources. There are two types of breakeven analysis, accounting and economic. Accounting breakeven is used to understand what volume must be achieved to reach zero profit. In contrast, economic breakeven is the required volume to reach the desired profit amount determined by organization. We will be looking at an economic breakeven analysis with the required profit being one million dollars in the first fiscal year.

Both options presented to CCHHS have many benefits and obstacles. The first option is to enter the sector by purchasing, operation and occupying a skilled nursing facilities. With this option, the employees would be employed by CCHHS and the facility would be part of the CCHHS system. The CCHHS would have to add skill-­‐nursing facilities to their contracts with Medicare and Medicaid in order to receive reimbursement. The second option would be to have the CCHHS resume their operations without any post-­‐acute care. In order to deem the skilled nursing facility as decent investment, the board of directors must see a profit of one million dollars at the end of the first fiscal year.

Term Project 4 For this project, we will only be looking at purchasing one skilled nursing home facility. This facility has the potential of occupancy of 106 patients at any time. According to the Center for Disease Control and Prevention, in 2004 the average occupancy rate is 86% (CDC, 2014). If the facility has 106 beds and the national occupancy average is 86%, CCHHS should expect its facility to have a consistent 92 patients. The average skilled nursing facility payment from Center for Medicare and Medicaid Services is $151.74 daily (CMS, 2014). It is also assumed that 10.3% of the treated patients in CCHHS are over the age of 65 years old which equates to 14,057 patients (CCHHS, 2012). This number will be used to determine the potential patients that would need a skilled nursing facility.

In option number one, CCHHS would own and operate its own skilled nursing facility. However, with acquiring this large facility, it comes with much more expenses and liabilities. A similar nursing facility in Chicago has a total value for the building and land appraised at $970,000 (City-­‐Data, 2014). This number will be used in an estimate of purchases a similar facility. However, the home must be modified with medical equipment, we will estimate the renovations and equipment reaching $800,000. For a 106 bed skilled nursing facility home and renovations we will assume it cost CCHHS $1.77 million dollars.

In previous capital expenditures, CCHHS has relied on debt financing through bonds. In this scenario, CCHHS will take a loan for $1.77 million at the current APR of 4.096% for ten years. The monthly payment for this loan would be would be $17,990.20. In the end, $388,824 will be paid in interest.

Next, the wages and benefits for the staff including two physician and seventeen nurses; five Registered Nurse; one per floor, five Licensed vocational nurse and seven

Term Project 5 certified nursing assistants. According to salary.com, a Registered Nurse makes about $72,000 every year, which is $6,000 monthly. Licensed Vocational Nurse makes about $44.000 or $3,667 monthly. Certified nursing assistant average salary is $25, 620 or $2,135 a month (Salary, 2014). The physicians will be contracted with the hospitals and will rotate between the facilities. Employee related expensive compose the largest percentage of any organizations budget.

Monthly revenue for one patient would be $151.74 x 30 (days)= $4,552.20, if insured by CMS. If paid by private means private insurance or out of pocket, the rates are much higher at almost $200 (Lincoln, 2012). For this assignment, we will assume all patents in the CCHHS skilled nursing facilities is paid for by CMS. The revenue from the skilled nursing facility is $418,802.40 monthly or $5,094,757.60 annually. This was derived from the CMS rate multiplied by ninety-­‐two patients multiplied by 365 days.

The monthly expenses would result be around $82,000 a month or $980,000 a year.

This amount includes the mortgage, employee salaries and utilities. This number comes from adding the mortgage payments adding up the seventeen different salaries and a estimated amount added for utlities. Profit is the revenue minus the expenses. In one fiscal year, the nursing facility has revenues of $5,094,757 and expenses of $980,000. The profit is $4,114,757.60, which is clearly way above the board of director’s requirements.

Return on Investment, (ROI) measures the rate of return on the total assets utilized in the company. It measures the efficiency and shows the return on all assets under CCHHS control regardless of the source of financing. Exhibit A and B, demonstrate CCHHS ROI before the nursing facility. It is important to note, CCHHS, completely remodeled their main

Term Project 6 hospital including their trauma center. Exhibit C and D demonstrate the numbers with purchasing a nursing facility and entering the post acute care sector. All the ratios are negative because this company is expensing more then they are bringing in. The company is operating at a loss. However, in 2012, Exhibit D, the percentage of ROI went down one point making it closer to 0. This does exemplify this nursing facility would be a good investment.

Net Profit Margin shows how much after-­‐tax profits are generated by each dollar of sales. In CCHHS situation, they are loosing money for every dollar of services provided.

Exhibit E and F are before purchasing a skilled nursing facility while Exhibit G and H are after the purchasing the skilled nursing facility. 2012 was a much better year for the CCHHS however, they are still at a negative.

Net Working Capital turnover is a measure of how effective the net working capital is used to generate sales. Net working capital is the difference between current assets minus current liabilities. The skilled nursing facility is a long-­‐term asset but the employees wages are current liabilities. Therefore there is a change in the net working capital when acquiring the skilled nursing facility. All of the ratios are relative low in comparison to other healthcare systems. Having such a low net working capital can lead CCHHS to run out of money to fun the business. In Exhibit J and I are without the skilled nursing facility and Exhibit K and L have the skilled nursing facility factored into the numbers. The 2011 numbers are lower than the 2012 because CCHHS was working on their remodel of their hospital therefore making their working capital lower.

Term Project 7 Debt to total asset ratio is an indicator of financial leverage. It shows the percentage of total assets that were financed by creditors, liabilities, and debt. Both ratios are going to be the same because in acquiring a skilled nursing facility, it effects both assets; building and equipment and the loan is going to be a liability in long-­‐term debt. There is an increase in the percentage of assets being financed by debt from 2011 as shown in exhibits M-­‐P. Again, this jump could be contributed to the remodel of the hospital. It has been proven that hospitals use debt to grow and replace aging infrastructure (Bordonaro, 2012). By Standards & Poor’s rating, CCHHS is a little low; having a low ration decreases the cash flow, which can have other implications.

Clinical Ratio: Pressure ulcers are a leading cost in nursing facilities. Pressure ulcers are a type of injury that breaks down he skin and underlying tissues. There are many causes of pressure ulcers, but the most common is when the skin is placed under constant pressure. The pressure cuts off the blood supply, depleting the tissue from oxygen leading to tissues breakdown and an ulcer to be formed. Pressure ulcers most commonly form on the lower part of the body, including the tailbone, buttocks and heels. Pressure ulcers can be prevented however, it is enviable they will occur, this ratio its to demonstrate an average amount and what is too be expected. The average number of pressure ulcer cases in a skilled nursing facility is 11% (Sullivan, 2013). Exhibit Q has the calculation, however, we can assume at any time eleven of our patients would have pressure ulcers.

Occupancy rate is large concern pertaining to having enough patients in the facility to cover expense. The average has been given already by CMS at 86%. This would make

Term Project 8 the skilled nursing facility have an average occupancy of 92 patients. See exhibit R for the calculations. It should not be an issue to occupy the facility due to the age wave approaching, the large number of elderly already enrolled in CCHHS system and the excellent repetition CCHHS has.

Economic Break-­‐Even Analysis is the amount of volume needed to produce a target profit level. The board of director already established the profit level for one million dollars. The calculations are done in exhibit T. In order to reach the profit level of the economic break-­‐even level, CCHHS skilled nursing facility would have to have 13,050 patient nights. This would require 92 patients to have their average length of stay being at least 142 nights.

The impending age wave gives CCHHS a wonderful opportunity to ender the post acute care sector of the healthcare industry. The facility would be a large capital investment however, in a couple of years it would be paid for. The occupancy rate is very high due to the age wave and will only increase in the next coming years. There are many benefits in CCHHS having a skilled nursing facility. The first benefit would be CCHHS is able to control cost and quality of care more efficiently and effectively. The next benefit is if a patient does become ill, they can take the patient to a CCHHS facility, which would increase revenue for the organization. My recommendations would be wait two years to in order to increase some of the ratios; make them less negative and to pay off some of the bonds and debt.

During the two-­‐year period, I would recommend contracting with other independent skilled nursing facilities. I do not recommend for CCHHS to completely stay out of the post-­‐ acute care sector.

Term Project 9 Exhibits Return on Investment: {Net Profit} or (Revenue-­‐Expenses)

Total Asset

Exhibit A: 2011: ($557,410,383-­‐ $1,029,903,672) = -­‐.57 or -­‐57% ($836,028,770)

Exhibit B: 2012: ($565,629,903-­‐$983,461,097)

($744,677,056)

=-­‐.56 or -­‐56%

Exhibit C: 2011: ($562,505,140-­‐$1,030,883,672) = -­‐.56 or -­‐56%

($836,998,770) Exhibit D: 2012: ($570,724,660-­‐$984,441,097) = -­‐.55 or -­‐55%

$745,647,056

Net Profit Margin: Net profit

Net sales

Exhibit E: 2011: ($557,410,383-­‐ $1,029,903,672) = -­‐.83 or -­‐83%

$557,410,383

Exhibit F: 2012: ($565,629,903-­‐$983,461,097) = -­‐.74 or -­‐74%

($565,629,903)

Exhibit G: 2011: ($562,505,140-­‐$1,030,883,672) = -­‐.83% or -­‐83%

Term Project 10

($562,505,104)

Exhibit H: 2012: ($570,724,660-­‐$984,441,097) = -­‐.72 of -­‐72%

$570,724,66

Net Working Capital turnover: Net Sales Net Working Capital Exhibit I: 2011: $558,410,383 = 2.59 ($379,867,246-­‐ $164,372,226) Exhibit J: 2012: 565,629,903 = 3.89 ( $304,053,625-­‐ $158,842,127) Exhibit K: 2011: $565,505,104 = 2.62 ($379,867,246-­‐ $ $164,390,216.20) Exhibit L: 2012: $562,505,104 =3.74 ($304,053,635-­‐ 158,860,117.20)

Debt to Asset Ratio: Total Debt Total Asset

Exhibit M: 2011: $210,660,520 =25% $836,038,770 Exhibit N: 2012: $208,191,694 =28% $744,677,056 Exhibit O: 2011: $212,430,520 =25% $837,808,770 Exhibit P: 2012: $209,961,694 = 28% 746, 447,056

Exhibit Q: Pressure ulcer precedency rate: 92 patients x 11%= 10 patients.

Term Project 11 Exhibit R: Occupancy rate: 106 capacity x 86%= 92 patients Exhibit T: ($151.72 x Volume) -­‐$980,000= $1,000,000 ($151.72 x Volume)=1,980,000 Volume= 13,050 patient nights

Term Project 12

Term Project 13 References Bordonaro, G. (2012, November 12). Hospitals using debt for growth. Hartford Business Journal. Retrieved May 9, 2014, from http://www.hartfordbusiness.com/article/20121112/PRINTEDITION/311099981/h ospitals-using-debt-for-growth CCHHS. (n.d.). Cook County Health and Hospitals System. Retrieved May 9, 2014, from http://www.cookcountyhhs.org/about-cchhs/ Centers for Disease Control and Prevention. (2013, May 30). Nursing Home Care.

Retrieved May 8, 2014, from http://www.cdc.gov/nchs/fastats/nursingh.htm Cook County Health and Hospitals System of Illinois. (2012, November 30). Financial Report. Retrieved May 8, 2014, from http://www.cookcountyhhs.org/wpcontent/uploads/2011/11/FINAL-CLIENT-CCHHS-Financials-11-30-12No126846.pdf Lincoln Financial Group. (n.d.). Cost of Care Survey. Retrieved May 8, 2014, from https://www.lfg.com/lfg/DOCS/pdf/rna/2013CostofCareSurvey.pdf Property valuation of Central Avenue, Highland Park, IL: 395, 397, 399, 400, 400, 405, 421, 440, 445, 446 (tax assessments). (n.d.). Property valuation of Central Avenue, Highland Park, IL: 395 (ZAKHAR & AHANET BARTASHNIK), 397 (MEGAN & MICHAEL ZILBERSTEIN), 399 (MARILYNN MCMANUS), 400, 400, 405, 421, 440, 445, 446 (tax assessments). Retrieved May 9, 2014, from http://www.city-data.com/lake-county/C/Central-Avenue-25.html Skilled Nursing Facility PPS. (n.d.). - Centers for Medicare & Medicaid Services.

Retrieved May 9, 2014, from http://www.cms.gov/Medicare/Medicare-Fee-forService-Payment/SNFPPS/index.html?redirect=/snfpps

Term Project 14

Staff Nurse - RN Salaries in Chicago, IL | Salary.com. (n.d.). Salary.com. Retrieved May 9, 2014, from http://www1.salary.com/IL/Chicago/Staff-Nurse-RN-Salary.html Sullivan, N. (2013). Making Healthcare Safer II: An Updated Critical Analysis of the Evidence for Patient Safety Practices. Agency for Healthcare Research, 211.

Retrieved May 8, 2104, from http://www.ncbi.nlm.nih.gov/books/NBK133388/

References Bordonaro, G. (2012, November 12). Hospitals using debt for growth. Hartford Business Journal. Retrieved May 9, 2014, from http://www.hartfordbusiness.com/article/20121112/PRINTEDITION/311099981 /hospitals-­‐using-­‐debt-­‐for-­‐growth CCHHS. (n.d.). Cook County Health and Hospitals System. Retrieved May 9, 2014, from http://www.cookcountyhhs.org/about-­‐cchhs/ Centers for Disease Control and Prevention. (2013, May 30). Nursing Home Care. Retrieved May 8, 2014, from http://www.cdc.gov/nchs/fastats/nursingh.htm Cook County Health and Hospitals System of Illinois. (2012, November 30). Financial Report. Retrieved May 8, 2014, from http://www.cookcountyhhs.org/wp-­‐ content/uploads/2011/11/FINAL-­‐CLIENT-­‐CCHHS-­‐Financials-­‐11-­‐30-­‐12-­‐ No126846.pdf Lincoln Financial Group. (n.d.). Cost of Care Survey. Retrieved May 8, 2014, from https://www.lfg.com/lfg/DOCS/pdf/rna/2013CostofCareSurvey.pdf Property valuation of Central Avenue, Highland Park, IL: 395, 397, 399, 400, 400, 405, 421, 440, 445, 446 (tax assessments). (n.d.). Property valuation of Central Avenue,

Term Project 15

Highland Park, IL: 395 (ZAKHAR & AHANET BARTASHNIK), 397 (MEGAN & MICHAEL ZILBERSTEIN), 399 (MARILYNN MCMANUS), 400, 400, 405, 421, 440, 445, 446 (tax assessments). Retrieved May 9, 2014, from http://www.city-­‐data.com/lake-­‐ county/C/Central-­‐Avenue-­‐25.html Skilled Nursing Facility PPS. (n.d.). -­‐ Centers for Medicare & Medicaid Services. Retrieved May 9, 2014, from http://www.cms.gov/Medicare/Medicare-­‐Fee-­‐for-­‐Service-­‐ Payment/SNFPPS/index.html?redirect=/snfpps Staff Nurse -­‐ RN Salaries in Chicago, IL | Salary.com. (n.d.). Salary.com. Retrieved May 9, 2014, from http://www1.salary.com/IL/Chicago/Staff-­‐Nurse-­‐RN-­‐Salary.html Sullivan, N. (2013). Making Healthcare Safer II: An Updated Critical Analysis of the Evidence for Patient Safety Practices. Agency for Healthcare Research, 211.

Retrieved May 8, 2104, from http://www.ncbi.nlm.nih.gov/books/NBK133388/