Analyzing Strategic Health Care


APPENDIX A 392393Analyzing Strategic Health Care Cases

How do students of management gain experience in strategic thinking and making strategic decisions in health care organizations? One way is to work their way up the organization, holding a variety of positions, experimenting as they develop their decision-making skills, and observing other leaders as they deal with issues and develop strategies. Then, when the opportunity presents itself, they combine what they have learned from others and their own management philosophy, and do the best they can. Unfortunately, learning by experimenting and observing others may be risky in rapidly changing environments and in the often unique situations that health care managers and leaders face.

Hospitals, HMOs, long-term care facilities, public health organizations, and other health services prefer to trust important decision making to experienced managers and leaders. Case studies have been successfully used as a surrogate method to provide aspiring managers and leaders with experience in strategic thinking, strategic planning, and making decisions without undue risk. The best case studies, such as those in this text, contain real situations actually faced by managers and leaders in health care organizations and are documented in a way that makes them useful in providing experience for future strategic decision makers. Because many future health care decision makers are not familiar with how to analyze cases, this appendix has been included, not to prescribe how cases should always be solved, but to offer some initial direction on how to surface and address the real issues presented in the cases.

393394An Overview of Case Analysis

Case analysis provides the student of health care an exciting opportunity to act in the role of a key decision maker. From hospitals to community blood centers to physicians’ offices, students have the chance to learn about a variety of health and medical organizations and to practice decision-making skills through analyzing cases.

The decisions required to “solve” cases represent a wide range of complexity, so that no two cases are addressed in exactly the same manner. However, the strategic thinking maps presented in this text provide frameworks to aid in strategically thinking about case issues. The fundamental task of the case analyst is to make decisions that will serve as a map to guide the organization into the future. Therefore, most case instructors will expect a comprehensive plan for the organization that addresses relevant current issues and provides a viable and reasonably complete strategy for the future. In order to achieve this goal, the case analyst typically should:

  • surface and summarize the key issues,
  • analyze the situation,
  • develop an organizational strategy,
  • develop an implementation plan, and
  • set some benchmarks to measure success.









APPENDIX B Financial Analysis for Health Care Organizations

Mahmud Hassan

The purpose of this appendix is to explain some basic concepts of finance as they relate to health care. Finance in health care does not require a different methodology but it does occur in a different context. Unlike most other sectors of the economy, the health industry is composed of both for-profit and not-for-profit organizations. In addition, it is dependent on technology and is heavily regulated by the government. These special characteristics of the industry have prompted the development of innovative ways to survive and grow financially.

To analyze the financial health of a hospital, long-term care, or other health care organization, you need to understand how to read the financial statements. The income statement and balance sheet are the two most important financial reports of an organization. Not-for-profit organizations do not produce income statements, but they may prepare balance sheets. In this appendix, we will compute financial ratios, net income, and other financial performances for Memorial Hospital, a for-profit hospital company, for the years 2007 and 2008. The detailed financial statements are available in the Annual Report of Memorial Hospital. Copies of 405406these statements are shown in Exhibits B–1 and B–2 (the notes that accompany the statements can be found in the Annual Report and are an integral part of the financial statements).

As previously mentioned, not-for-profit organizations are not required to prepare balance sheets or income statements. However, some not-for-profit health care organizations do prepare balance sheets to satisfy requirements of the Securities and Exchange Commission (SEC) and the rating agencies (Moody’s or Standard and Poor’s) when they borrow money by selling bonds. For example, University Hospital (a not-for-profit organization) borrowed money in 2009 from the capital market by selling bonds. It had to prepare a balance sheet for three years, 2006 through 2008, to have its bonds rated. The balance sheet for University Hospital is shown in Exhibit B–3. Publicly traded for-profit hospitals are required by their charters to produce balance sheets and income statements each year. As mentioned earlier, we will analyze the financial statements of Memorial Hospital in this appendix.

Exhibit B–1: Memorial Hospital Consolidated Statement of Income (in thousands of dollars except per share amounts)

  2006 2007 2008
Revenues $2,973,643 $3,435,397 $4,087,994
Operating expenses 2,340,178 2,786,230 3,401,884
Depreciation and amortization 180,197 195,651 209,469
Interest expense 154,156 145,938 138,477
Interest income (30,923) (46,064) (60,570)
  2,643,608 3,081,755 3,689,260
Income before income taxes 330,035 353,642 398,734
Provision for income taxes 147,196 126,602 142,747
Income before extraordinary items and cumulative effect of a change in accounting principle 182,839 227,040 255,987
Extraordinary loss on early extinguishment of debt, net of income tax of $9,597 (16,133)
Cumulative effect on prior years of a change in accounting principle for retirement plan actuarial gains, net of income tax of $9,645 16,214
Net income $182,839 $227,121 $255,987
Earnings per common share:      
Income before extraordinary item and cumulative effect of a change in accounting principle $1.86 $2.30 $2.56
Extraordinary loss oh early extinguishment of debt (.16)
Cumulative effect on prior years of a change in accounting principle for retirement plan actuarial gains .16
Net income per share $1.86 $2.30 $2.56


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