Financial statements can provide substantial information regarding a hospital’s operations, including its revenue, assets, and cash flow, which display the ability of an organization to be profitable. The General Practice Affiliates intends to partner with the Titus Lake Hospital, which will provide the former with the ability to take advantage of the provider leasing model. This paper aims to evaluate the validity of this offer by examining the financial statements of Titus Lake Hospital.
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Titus Lake Hospital is an excellent financial partner for the General Practice Affiliates because the organization earns substantial revenue, has sufficient assets and cash flow. The current financial statement provided by the hospital indicates that in 2012 this organization was able to generate an income of $360,000. This provides an understanding of the net revenue that this organization was able to obtain. Paterson (2014) states that the balance sheet, income, and loss statements are critical elements that should be examined. The total assets increased in 2012 from 366,666 to 375,500, which indicates that the hospital’s value improved. A cash flow statement is also a valuable part of the financial reporting that will help understand the revenue that Titus Lake Hospital was able to receive. The report indicates that the hospital had several sources of receiving cash and used it to pay for short-term loans and acquisitions. The levels of debt that Titus Lake Hospital has are not high, which indicates that the reassurance in the establishment’s repayment capacity.
The level of financial resources required to support the transition from one electronic health record system to the other is estimated at $275,000. In case the General Practice Affiliate’s current system is not compatible with that used by Titus, the organization will have to transition and use the new program fully. The cost of purchasing a new system is $175,000, while additional investment will be required for staff training, and it is estimated at $100,000. Therefore, in order to transfer 750 patient records, the practice will have to invest at least $275,000 in total.
Based on the analysis of the current capital structure of the General Practice Affiliates, the purchase of the new electronic health record system should be made using retained earnings. Paterson (2014) states that healthcare providers rely on financial capital that can support their daily operations. The financial statement indicates that in 2012 the company was able to retain $306,180. This money is usually saved and applied for purchasing equipment; thus, re-investing this money will help the general practice avoid additional expenses. Alternatively, the organization can attract investors since it is capable of servicing its debt. In this case, the $275,000 required for the new health record system can be paid both from the retained earnings and by using the investment, which will help the General Practice Affiliates to minimize risks.
Return on investment (ROI) allows identifying the gain from purchasing the health record system when compared to the amount of money used to buy it. A reasonable return on investment for the General Practice’s new medical record system would be 15%, which is currently an average ROI in the business. The current economic environment pertinent to this discussion is the healthcare industry. Thus, the assumptions were based on relevant data regarding the ROI.
The risks inherited by the Titus Lake provider are connected to the reimbursement for services that will be facilitated through the hospital. According to Paterson (2014), two primary categories of risks should be considered – financial and business-related, which will be discussed below. Thus, the issue is the ability of Titus Lake to process and provide timely payments to general practitioners. The three risk managing strategies for the partners involve penalties, fee negotiation, and a unified accounting system. It is crucial to ensure that the payments for services provided by the General Affiliates are received on time. Thus, the two organizations should have an agreement regarding possible penalties in case of a delay.
Next, the General Affiliates should have a right to negotiate fees in case of price changes of its services. Due to the fact that the General Affiliates are going to operate under the hospital’s name and receive payments from third parties, the process of determining fair market value may be complicated. The issue may arise in case the tax policy or approaches that insurers use for reimbursement change, which will have a significant problem for General Affiliates. Finally, to avoid accounting and reporting issues that may lead to a rejection of payment claims, both General Affiliates and Titus Lake should ensure that their accounting systems are compliant.
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Overall, the leasing agreement will benefit General Affiliates because it will allow the establishment to have a more substantial number of patients referred to them by Titus Lake. Based on the fact that the hospital has a coherent financial statement that displays sufficient revenue, the two organizations can become efficient partners. Due to the requirement of purchasing a new electronic health record system, the General Affiliates will have to use the retained revenue and apply management strategies to mitigate prospective risks.
Paterson, M. A. (2014). Healthcare finance and financial management. Lancaster, PA: Destech Publications.