Cooley Dickinson Hospital Incorporation Case Solution
Cooley Dickinson Hospital Incorporation Case Study Aids Xyz
Cooley Dickinson Hospital Incorporation is a subsidiary of Cooley Dickinson Health Care Corporation which has been providing health care services since 1885. Cooley Dickinson’s aim is to provide best health care services to its patients and communities with the help of its associated hospitals (Brigham and Women's Hospital & Massachusetts General Hospital, n.d.).
Cooley Dickinson Hospital Incorporation is a non for profit, 140 bed community health care service provider in Northampton, Massachusetts which provides a wide range of patient and community services such as critical medicine treatment, surgery, psychiatry and rehabilitation (PWC, 2012).
Parent company of Colley Dickinson Hospital Incorporation generates and maintains funds raising support programs for the benefits of hospital which ultimately provides assistances to patients that are unable to bear the expenses related to prescription and treatment of health care facilities.
Cooley Hospital is also the member of Mary Hitchcock Memorial Hospital Obligated Group (dominant lender of the hospital). In January 2009, Mary Hitchcock established New England Alliance for Health (NEAH) that helped to provide a wide variety of health care services to a number of community hospitals such as consulting and group purchasing. NEAH located in New Hampshire and Cooley Dickinson Hospital Incorporation.
Cooley Dickinson Hospital main campus is located in Northampton while its outpatient’s locations are Amherst, Belched town, Easthampton, Hadley, South Deer field, Florence, South Hadley, Worthington, Southampton and Williams burg.
Colley Dickinson’s staff has expertise in different areas of hospital services, such as; emergency services, clinical and surgical services, rehabilitation, medical services and preventive care services.
Financial Ratios Analysis:
Financial ratios of Cooley Dickinson Hospital Incorporation are calculated to measure the liquidity, profitability and solvency / capital structure position of hospital.
Profitability analysis of a hospital has been performed to measure its ability to generate profits from its total revenues. Profitability of the hospital has been measured through calculation of three ratios which are operating margin ratio, non-operating margin ratio and total margin ratio.
Operating Margin Ratio:
Operating margin of a Cooley Dickinson Hospital is calculated by dividing its operating income to total revenues.
Operating Margin = Operating Income
Operating margin of Cooley Dickinson for the year of 2011 is 5.61% and for the year of 2012 is 10.06% as compared to Cooley Dickinson operating margin ratio to industry benchmark i.e. 2.20%, its operating margin ratio is favorable with increasing trend from 2011 to 2012. This increasing trend of operating ratio shows that the hospital’s expenses ratio over revenues is decreasing which is leading to an improvement its operating margin ratio.
Non - Operating Margin Ratio:
Non - operating margin ratio of Cooley Dickinson is calculated by dividing non - operating income to its total revenues.
Non - operating margin = Non-Operating Income
Non – operating margin of Cooley Dickinson for the year of 2011 is – 0.29% and for the year of 2012 is 0.95%. In comparison to Cooley Dickinson non – operating margin ratio, its industry benchmark is 0.80%. Its non – operating margin ratio is unfavorable with increasing trend in ratio from 2011 to 2012. This increasing trend shows that Cooley Dickinson non – operating expenses ratio over its non – operating income is decreasing which ultimately leads to an increase in non – operating margin.
Total Margin Ratio:
Total margin ratio of Cooley Dickinson has been calculated by dividing its total income to its total revenues.
Total Margin Ratio = Total Income
Total margin ratio of Cooley Dickinson for the year ended September 2011 is 5.32% and for the year ended September 2012 is 11.01%. By comparing Cooley Dickinson total margin ratio to its industry average 3.40%, it has been concluded that Dickinson’s total margin ratio is favorable with increasing trend from 2011 to 2012. This increasing trend in total margin ratio shows that hospital’s earning is more than its yearly expenses.
Liquidity is a term used to assess the freely conversion of assets into cash. Liquidity measures that how quickly an asset can be converted into cash, in order to pay all of its current debt. For this purpose, three liquidity ratios have been calculated to measure the Colley Dickinson liquidity position, which are: current ratio, average days in accounts receivable and average payment period.
Current ratio of Cooley Dickinson has been calculated by dividing its current assets with its current liabilities.
Current ratio = Current Assets
Current ratio of Cooley Dickinson Hospital at the year ended September 2011 is 1.72 and at the year ended September 2012 is 1.54. By comparing Cooley Dickinson current ratio to its industry average 1.51, it has been found that its current ratio is favorable with decreasing trend from 2011 to 2012. This decreasing trend shows that Cooley Dickinson current assets have been decreased as compared to its current liabilities. It might have happened because of a decrease in current assets or an increase in current liabilities.
Average Days in Accounts Receivable:
Average days in accounts receivable of Cooley Dickinson have been calculated by dividing net patient accounts receivable to its per day net patient service revenue.
Average Days in Accounts Receivable = Net Patient Accounts Receivable
(Net Patient Service Revenue / 365 days)
Average days in accounts receivable of Colley Dickinson Hospital for the year ended 2011 is 29.14 days and for the year ended 2012 is 32.95 days, which is lower than the industry average 38 days. This lower ratio is favorable with increasing trend from 2011 to 2012 as compared to its industry average, which shows that Colley Dickinson Hospital has been effective in collecting its accounts receivable as compared to other community hospitals in the industry. This increasing trend in average days of accounts receivable indicates that the hospital’s efficiency in collection of its outstanding is decreasing, which is leading to an increase in receivables collection period ultimately resulting in the consumption of more time for the conversion of its receivables into cash. (towards liquidity problems).
Average Payment Period:
Average payment period of Cooley Dickinson is the ratio of total current liabilities minus estimated third party settlements to per day total expenses minus per day depreciation and amortization expenses.
Average Payment Period = Current Liabilities – Estimated Third Party Settlements
(Total Expenses – Depreciation and Amortization / 365 Days)
Average payment period of Cooley Dickinson for the year ended 2011 is 68.53 days and for the year ended 2012 is 80.55 days, which are greater than the industry average 57 days. This greater ratio shows that the hospital takes too much time to pay its outstanding to creditors. This strategy is effective as well as efficient for the company in two ways. First, it provides benefit to the hospital by comparison through time value of money (TVM) and second, it takes almost 81 days to pay its outstanding to creditors. Hospital’s average payment days are favorable as compared to the industry average with increasing trend from 2011 to 2012, which shows that the hospital takes an increased amount of time to pay its outstanding than industry average.
Solvency and Capital Structure Analysis:
Solvency is an indicator of long term financial health that is used to measure hospital’s ability to encounter its total debt obligations. Here, three ratios are calculated to measure the Cooley Dickinson Hospital’s solvency which are debt service coverage ratio, cash flow to total debt and equity financing.
Debt Service Coverage Ratio:
Debt service coverage ratio of Cooley Dickinson Hospital is the ratio of total income plus interest expense plus depreciation and amortization expense to interest expense and current portion of long term debt (LTD).
Debt Service Coverage Ratio =
Total Income + Interest Expense + Depreciation and Amortization Expense
Interest Expense + Current Portion of Long Term Debt (LTD)
Debt service coverage ratio of Cooley Dickinson for the year ended 2011 is 4.09 and for the year ended 2012 is 6.67 which is greater than the industry average 4.48 and shows the favorable results with increasing trend form 2011 to 2012. This increase in the ratio shows that the hospital generates sufficient operating income to pay its debt charges and interest payments. An increase in trend shows that the hospital’s operating income is increasing gradually with decreasing rate in debt and interest expenses form its revenues.
Cash Flow to Total Debt:
Cash flow to total debt for Cooley Dickinson is a ratio of total income plus depreciation and amortization expense to total current liabilities and long term debt (LTD).
Cash Flow to Total Debt = Total Income + Depreciation and Amortization Expenses
Current Liabilities and Long Term Debt (LTD)
Cash flow to total debt ratio of Cooley Dickinson for the year ended 2011 is 21.4% and for the year ended 2012 is 29.31% which are greater than the industry average 23.1% and shows the favorable result with an increasing trend form 2011 to 2012. This increase in ratio shows that hospital is generating enough cash from its operating activities to pay its total liability (current plus LTD) as compared to industry average.
Equity financing ratio of Cooley Dickinson has been calculated by dividing the total net assets to total assets or total equity to total assets.
Equity Financing = Total Net Assets or Total Equity
Equity financing ratio of Cooley Dickinson at the year ended 2011 is 30.96% and at the year ended 2012 is 33.92% which are lower than the industry average 39.6% and shows an unfavorable increasing trend from 2011 to 2012. Lower ratio form industry average shows that the hospital is highly financed by debt while an increasing trend in ratio shows that capital structure of Cooley Dickinson (high debt and low equity) is shifting towards equity financing by decreasing its current liabilities and long term liabilities. (LTD).
After doing Cooley Dickinson financial analysis by measuring profitability, liquidity and solvency / capital structuring position of the hospital, it has been found that the company is financially stable as compared to the other community hospitals in the industry.
Apart from the financially sound position of the hospital, some areas still need to be stable in order to get more profit generation and cash flows for the hospital. These areas are collection period of accounts receivable, payment period of accounts payable and equity financing.
For the purpose of reducing the average days in accounts receivable, the hospital should implement some strategies to eliminate the excessive time in billing, invoicing and emailing through postal services which takes much time and several days in process. In order to reduce this process time, the hospital should go for electronic billing and invoicing which reduces such time consumption in accounts receivable collection period that helps to avoid liquidity problems for the hospital.
Apart from it, healthy work relationship and clear credit policies will also help to reduce average days in inventory. Clear credit policies such as discounts, penalties, payment terms and conditions etc. will also be beneficial for the hospital in order to eliminate excessive days from accounts receivable. (Maguire, 2019).
Although long average payment period is beneficial for the hospital but long delay can affect the relationship with creditors. For this purpose, the hospital’s management should call upon a meeting with its creditors and with mutual agreement and set some clear credit policies like discounts within 30 days period, payments methods and terms and conditions etc. These credit policies will help to make long term relationship with creditors that would be beneficial in several ways like huge discounts, good quality and much more. These benefits from supplier’s side can help Cooley Dickinson Hospital Incorporation to get competitive advantage over the competitors.
In order to improve equity to total assets ratio, the hospital should offer some shareholders capital or have an increase in fund raising support program in order to generate and maintain funds for the hospital. These funds increase the total assets as well as total net assets which ultimately leads to an increase in total net assets to total assets ratio.