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Jiranna Healthcare Case Analysis

Introduction

The present paper discusses three general aspects of Jiranna Healthcare case study. The first part conducts an appraisal of the firm’s financial performance to help Arizona Health Services (AHS) make a purchasing decision. In particular, the first part assesses sales, expenses, profits, efficiency, profitability, liquidity, solvency, and DuPont coefficient between 2009 and 2013. After conducting the analysis, it provides recommendations based on the strengths and weaknesses of the company. The second part provides capital investment assessment to understand if Jiranna Healthcare should invest in a centralized nurse triage line using. The evaluation uses net present value and internal return rate methodologies to understand if investment in the project complies with the company’s policies. The final part of the present paper assesses mid-year projections of revenues, expenses, and profits. It also provides strategies to improve current performance in terms of profits.

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Financial Appraisal of Jiranna Healthcare

Financial appraisals are crucial for making decision investments, as they help to estimate the financial health of the organization and assess investment risks. The present report provides a historical analysis of all aspects of Jiranna Healthcare’s financial performance to decide if AHS should purchase the organization. Historical analysis of a firm’s profitability, efficiency, liquidity, solvency, and DuPont coefficient help to and understand the firm’s strengths and weakness and identify trends in financial performance.

Sales, Expenses, and Profit

Jiranna Healthcare experience a significant rise in revenues and profits between 2009 and 2013. Table 1 below demonstrates the trends in net sales, operating expenses, operating income, and net income. The table demonstrates that the revenues have grown by 33% during the past five years while operating income grew by 2755% during the five years. In comparison with 2012, operating income grew by 33%, while revenues grew only by 8%. This implies that Jiranna Healthcare managed to decrease the expenses and increase sales considerably during the past five years.

Table 1. Jiranna Healthcare sales, expenses, and income (in thousands).

2009 2010 2011 2012 2013
Net Sales $8,609 $9,233 $10,079 $10,417 $11,430
Operating Expenses $8,582 $9,143 $9,673 $9,821 $10,631
Operating Income $27 $90 $406 $596 $799
Net Income $181 $285 $651 $816 $1,089

Profitability and Efficiency

Profitability analysis demonstrates how efficiently a company uses its resources to generate income (Husain & Sunardi, 2020). Efficiency ratios demonstrate how well a company can manage its assets and liabilities to generate cash (Sunjoko, & Arilyn, 2016). For instance, the asset turnover ratio shows how much money the company has earned for every dollar of the assets. Table 2 includes the trends in all the ratios mentioned above to conduct the analysis. The table shows that the profitability of the company was growing fast throughout the past five years when considering all the three ratios. At the same time, the efficiency of the company remained almost unchanged, which is a sign of stability.

Table 2. Profitability and efficiency ratios.

2009 2010 2011 2012 2013
Profit Margin 2.11% 3.12% 6.73% 8.31% 10.24%
Asset Turnover 1.17 1.16 1.19 1.14 1.16
ROA 2.46% 3.58% 7.68% 8.92% 11.06%
RONW 4.21% 6.22% 14.40% 16.39% 20.12%

Liquidity

Liquidity ratios help to find out if the company has enough current assets to cover its current debt without raising additional capital from external resources (Saleem & Rehman, 2011). Ratios that are commonly used for assessing the matter are current ratios, cash on hand, and working capital. The analysis of the past five years demonstrated that the liquidity of the company had improved significantly during the past five years (see Table 3 below). The working capital more than doubled during the past five years. Additionally, the company has enough cash to cover for more than 65 days without inflows. This implies that the company will not require capital to cover its current expenses.

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Table 3. Liquidity ratios.

2009 2010 2011 2012 2013
Current Ratio 2.82 3.26 3.32 3.89 4.66
Days Cash on Hand 1.30 1.83 1.92 2.84 3.08
Working Capital 1180 1325 1521 1928 2503

Solvency

Solvency is usually measured with debt-to-total assets and times interest earned ratios, which demonstrate how aggressively the company uses debt to generate income. The analysis demonstrates that Jiranna Healthcare relies more on equity than on debt, which makes it less vulnerable to changes in the outside environment. The company demonstrated a significant rise in the times interest earned (TIE) ratio, which implies that the company has enough money to invest in its development after paying interest (see Table 4 below).

Table 4. Solvency ratios.

2009 2010 2011 2012 2013
Debt Ratio 0.41 0.45 0.47 0.46 0.45
TIE 2.27 2.95 5.23 5.56 6.50

DuPont Analysis

DuPont analysis is another measure of return on equity, which allows us to see how efficiently the company utilizes capital from shareholders (Jin, 2017). The analysis demonstrates that the DuPont coefficient has been growing steadily due to a rise in the total profit margin (see Table 5 below). This implies that the company is continuously improving its capital management efficiency.

Table 5. DuPont analysis.

2009 2010 2011 2012 2013
DuPont analysis 4.22% 6.28% 15.00% 17.39% 21.63%
Total Margin 2.11% 3.12% 6.73% 8.31% 10.24%
Total Asset Turnover 1.17 1.16 1.19 1.14 1.16
Equity Multiplier 1.71 1.73 1.87 1.84 1.82

Recommendations

Based on the analysis of trends, Jiranna Healthcare is an adequate option for acquisition. The analysis demonstrates that the DuPont coefficient grew by 500% during the past five years without a significant increase in equity multiplier, which is a sign of financial health. Jiranna Healthcare does not use debt aggressively, which makes it flexible and stable. Additionally, the company has high liquidity, as it has more than doubled its working capital and the current ratio increased from 2.82 to 4.66 during the past five years. However, there are some considerations against purchasing the company. First, even though the profit margin is growing, it is somewhat low. It needs to be compared with the competitors to understand if the ratio is adequate. Second, the company does not have enough cash on hand to cover its immediate expenses. This may lead to the need to raise additional capital. However, despite the possible considerations against purchasing the company, the analysis shows that Jiranna Healthcare’s management is improving constantly in all directions.

Capital Investment Appraisal Report

Issue

Currently, Jiranna Healthcare experiences significant accessibility issues. These issues affect the expenses associated with the utilization of the ER department for urgent care and primary care concerns. Implementation of a centralized nurse triage line was proposed as one of the possible solutions to the problem. However, the project is associated with a significant rise in personnel costs due to a necessity to hire high-skilled nurses and an IT specialist. The present report assesses if Jiranna Healthcare should invest in the solution and create a nurse triage line.

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Appraisal Method

There are two primary methods that help to evaluate the profitability of a project. These methods are Net Present Values (NPV) and Internal Rate of Return (IRR). NPV is the difference between the present value of all the money generated over a set time period (Cheng et al., 1994). NPV is a crucial method for understanding how much a project is expected to generate in absolute numbers. While the method is frequently used by financial specialists, it has some definite flaws. In particular, it does not allow to compare project of different sizes. Thus, if a company needs to decide between several capital investment options of different caliber, it is beneficial to use IRR. Calculations of an IRR provide percentage values, which shows how much the discount rate should be to generate an NPV of zero (Cheng et al., 1994). While this method allows comparing several options in terms of their relative profitability, it may prevent stakeholders from selecting the project that will bring the most cash. Thus, it is usually beneficial to use both metrics simultaneously.

Calculations

The calculations of NPV and IRR are rather simple as long as all the predictions are reliable. The calculations are usually performed in Excel or other spreadsheet software, as it allows convenient manipulation of data. The forecasts of expenses and benefits are provided in Table 6 below. All the calculations use 11% as the cost of capital.

Table 6. Capital budget Analysis.

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Nurse Triage Salaries $ 523,800 $ 549,990 $ 577,490 $ 606,364 $ 636,682 $ 668,516
Forecasted ER Cost Reductions $ 400,000 $ 800,000 $ 848,000 $ 900,577 $ 955,512 $ 1,013,798
New IT Specialist’s Salary $ 150,000 $ 154,500 $ 159,135 $ 163,909 $ 168,826 $ 173,891
Costs of Facility Renovations $ 30,000 $ – $ – $ – $ – $ –
Necessary Capital Equipment Purchases $ 117,000 $ 3,510 $ 3,510 $ 3,510 $ 3,510 $ 3,510
Net Cash Flow: $ (420,800) $ 92,000 $ 107,865 $ 126,794 $ 146,494 $ 167,881
Present Values of Net Cash Flows: $ (420,800) $82,883 $87,546 $92,711 $96,500 $99,629
Net Present Value: $ 38,469
Internal Rate of Return (IRR): 14%
Modified Internal Rate of Return (MIRR): 13%
Payback Period (# years): 3.64
Discounted Payback Period (# years): 4.61

Results and Recommendations

The results demonstrate that the investment is expected to bring profits within five years from the initial investment. The project can be considered profitable, as it is expected to bring $38,469 in NPV. IRR and modified IRR are both above the current cost of capital of 11%, which makes the investment in the project acceptable. However, it is crucial to notice that Jiranna Healthcare has a policy, according to which it does not accept projects if they do not pay for themselves within 3.5 years. The estimated payback period of the investment is 3.64 years, which is slightly above the threshold. Even though the payback period is close to the desired 3.5 years, it should be noticed that the discounted payback period is 4.61 years, which is significantly above the threshold. Thus, it is recommended that Jiranna Healthcare finds another way to address accessibility issues.

Budget Variance Analysis

Original and Revised Profit Forecasts

Budgeting in healthcare is essential, as it helps to understand how much money an organization can spend on projects (Walsh, 2016). Budgets often include the projections for expenses and revenues based on the analysis of the financial environment and demand (Gapenski, 2016). Budgets are usually revised during the year to understand if corrections are to be made to ensure that the organization stays on budget. The present section provides a mid-year analysis of Jiranna Healthcare’s budget.

Profits are calculated by subtracting total expenses from total revenues. Thus, the original profit forecast for FY11 (without considering possible issues with depreciation and taxes) was:

Profitprojected = $50.155.710 – $48.069.60 = $2.085.850

The revised profit forecast for FY11 can be calculated by subtracting the actual expenses for half of the fiscal year from the actual revenues and multiplying them by two, assuming that the organization will perform identically during the second part of the year. Thus, the revised projection for the profit can be calculated the following way:

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Profitrevised = ($24.220.949 – $25.256.069)*2 = -$0.070.226

Since the revised profit projections are negative, interventions are needed to avoid financial issues.

Inpatient Service Lines

The first step to understanding the problem is to identify what inpatient service lines are currently over budget. This can be done by subtracting the projected expenses from the actual expenses for half a year multiplied by two. If the number is positive, the service line went over the budget. Utilization of this approach demonstrated that almost all the inpatient service lines went over budget, except for diseases and disorders of the musculoskeletal system and connective tissue, diseases and disorders of the respiratory system, and other diseases and disorders. However, this approach does not consider the changes in workload. In order to understand if the service line went over budget, it is beneficial to subtract the percent change in workload from the percent change in expenses. If the number is positive, the service line went over budget after controlling for the changes in the workload. All the calculations are demonstrated in Table 7 below.

Table 7. Budget variance calculations by service line.

Expense Difference Expense difference (%) Workload difference Workload difference (%) Δ Expenses- Δ workload (%)
CIRC $743,288 17.69% 118 16.30% 1.39%
DIGEST $1,975,158 29.32% 111 9.56% 19.76%
ENT $170,802 22.63% 14 10.77% 11.86%
GYN $285,697 22.51% 13 5.94% 16.58%
MENTAL $87,177 12.20% 121 8.96% 3.25%
NERVOUS $26,227 1.98% -4 -1.75% 3.74%
NEWBORN $1,685,114 39.59% 133 18.14% 21.44%
OB $2,228,669 25.57% 235 15.66% 9.91%
ORTHO -$122,431 -3.34% -83 -13.15% 9.81%
OTHER -$3,173,269 -25.39% -552 -25.65% 0.26%

The analysis demonstrates that all the service lines went over budget, which implies that the projections were systematically inaccurate. Based on the expenses, the revenue, and the projected profit, all the product lines appear unfavorable. The most underperforming service lines are digestive system disorder care, neonatal service line, and gynecology. Thus, even though a systematic change is needed, closer attention should be given to these three service lines.

Recommendations for Fee-For-Service Hospital

When discussing fee-for-service hospitals, there are two ways to affect profitability: increase revenues or decrease expenses. In the current situation, it is clear that the organization spends more money on every procedure than it gains in revenues. Thus, the easiest way to increase the revenues from every procedure is to increase their price. The analysis demonstrates that increasing the projected expenses considering only the rate of inflation was suboptimal. Therefore, the price of procedures needs to be revised.

The second approach to solving the issues is reducing the expenses per procedure. The cost of every medical procedure usually includes the associated tests to ensure the applicability of prescribed treatment. Thus, the expenses per procedure can be decreased by reducing the number of unnecessary tests (Bindraban et al., 2018). Using tests wisely can lead to a decrease in expenditures and an improvement in patient safety (Bindraban et al., 2018). The decrease in expenditures is associated with improved efficiency of human resource utilization and decreased amount of bad debt. According to the Protecting Access to Medicare Act (PAMA), Medicare will continue to reduce reimbursements for lab tests to make incentives for hospitals to reduce unnecessary tests (Centers for Medicare and Medicaid Services [CMS], 2020). Thus, I would recommend revising the best practices to decrease the number of unnecessary tests. Benchmarking is expected to be one of the most applicable strategies in this situation. A similar approach can be used for capitated hospitals.

Recommendations for Capitated Hospital

In capitated hospitals, the insurance companies pay for every patient associated with a hospital. Thus, the revenues for every year are fixed, and the only way to affect revenues is to decrease the expenditures. However, in comparison with fee-for-service hospitals, it is easier to decrease the expenditures without affecting the revenues. In particular, the hospital should reduce unnecessary visits to hospitals by reducing the readmission rates and reducing the number of unnecessary preventative care. This implies that the hospital needs to review A and B recommendations of the US Preventive Service Task Force to understand if current preventive procedures are adequate. Additionally, Jiranna Healthcare should consider implementing evidence-based strategies for reducing readmission rates. One such practice is the implementation of the transitional care model (TCM). TCM is the integration of nurse-led multidisciplinary teams that can reduce the number of readmissions by identifying patient health goals, creating streamlined care plans, communicating between different stakeholders for implementing the care plan (Morkisch et al., 2020). While there are other evidence-based interventions that can reduce readmission rates, implementation of TCM is highly recommended.

Another approach to reducing the costs is implementing a health IT system to monitor expenses. In particular, the hospital can implement a Health Information System (HIS) that can collect data for statistical process control (SPC). According to Gupta and Kaplan (2017), quality improvement can be achieved through careful monitoring of resources and identifying wastes. Control charts are crucial for timely reactions to increased expenses or discrepancies in process outcomes. However, control charts can be beneficial only if the input data is accurate. Thus, the implementation of an HIS is crucial for decreasing expenditures. The same approach can be used for fee-for-service hospitals.

References

Andjelic, S., & Vesic, T. (2017). The importance of financial analysis for business decision making. In Book of proceedings from Sixth International Scientific Conference Employment, Education and Entrepreneurship (pp. 9-25). Faculty of Business Economics and Entrepreneurship.

Bindraban, R., Berg, M., Naaktgeboren, C., Kramer, M., Solinge, W., & Nanayakkara, P. (2018). Reducing test utilization in hospital settings: A narrative review. Annals of Laboratory Medicine, 38(5), 402-412. Web.

Centers for Medicare and Medicaid Services. (2020). PAMA regulations. CMS. Web.

Cheng, C. A., Kite, D., & Radtke, R. (1994). The applicability and usage of NPV and IRR capital budgeting techniques. Managerial Finance 20(7), 10-36. Web.

Gapenski, L. C. (2016). Healthcare finance: An introduction to accounting and financial management (6th ed.). Health Administration Press.

Gupta, M., & Kaplan, H. C. (2017). Using statistical process control to drive improvement in neonatal care. Clinics in Perinatology, 44(3), 627–644. Web.

Husain, T., & Sunardi, N. (2020). Firm’s Value Prediction Based on Profitability Ratios and Dividend Policy. Finance & Economics Review, 2(2), 13-26.

Jin, Y. (2017). DuPont analysis, earnings persistence, and return on equity: Evidence from mandatory IFRS adoption in Canada. Accounting Perspectives, 16(3), 205-235.

Morkisch, N., Upegui-Arango, L. D., Cardona, M. I., van den Heuvel, D., Rimmele, M., Sieber, C. C., & Freiberger, E. (2020). Components of the transitional care model (TCM) to reduce readmission in geriatric patients: a systematic review. BMC Geriatrics, 20(1), 1-18.

Saleem, Q., & Rehman, R. U. (2011). Impacts of liquidity ratios on profitability. Interdisciplinary Journal of Research in Business, 1(7), 95-98.

Sunjoko, M. I., & Arilyn, E. J. (2016). Effects of inventory turnover, total asset turnover, fixed asset turnover, current ratio and average collection period on profitability. Jurnal Bisnis dan Akuntansi, 18(1), 79-83.

Walsh, K. (2016). Managing a budget in healthcare professional education. Annals of Medical And Health Sciences Research, 6(2), 71-73. Web.

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