The Financial Analysis of VA Ann Arbor Healthcare System - Case Study Example

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Ann Arbor VA Healthcare System – Veterans’ Affairs – Financial Analysis Table of contents PART ONE 0 Strategic Plan – Financial ment Analysis……………………………………..3 1.1 Strategic Plan overview…………………………………………………………….3 1.2 Financial Statement Analysis………………………………………………………4 1.2.1 Balance Sheet…………………………………………………………………4 1.2.2 The Statement of Net Cost……………………………………………………5 1.2.3 The Statement of Change in the Financial Position…………………………..7 1.2.4 The Statement of Change in the Fund Balance……………………………….8 PART TWO Principal sources of revenue for Ann Arbor VA and the principle uses of this revenue……9 PART THREE Presentation and evaluation of the Budget and Planning System used in Ann Arbor VA….10 PART FOUR Analysis of the Balance Sheet and the Statement of Revenue and Expenses………………12 PART FIVE Discuss the future trends in Healthcare and their impact on Financial Management………14 REFERENCES……………………………………………………………………………..16 APPENDIX…………………………………………………………………………………17 PART ONE 1.0 Strategic Plan – Financial Statement Analysis 1.1 Strategic Plan overview The Ann Arbor VA focuses on the provision of healthcare services to the veterans of US (Strategic Plan, p.11). The mission statement of Ann Arbor VA is as follows: “To care for him who shall have borne the battle, and for his widow, and his orphan” (Affairs 2013). It is made clear that the organization’s role within its industry is unique. The values of Ann Arbor VA are aligned with the needs of its stakeholders and with ethics held in the healthcare industry: ‘compassion, excellence, accountability and integrity’ (Affairs 2013) have been incorporated in the organization’s values for securing the achievement of the organization’s mission. In the organization’s strategic plan it is made clear that the organization’s services address the needs not just of the veterans, but also of their families, a practice that indicates the recognition for the veteran’s contribution in the power of the country as a member of the international community (Strategic Plan, p.5). One of the key challenges that Ann Arbor VA has to face is the ‘continuous change in its operating environment’ (Strategic Plan, p.12). The number of US veterans involved in military operations worldwide is continuously increased (Strategic Plan, p.12). Therefore, the demands for healthcare services from Ann Arbor VA tend also to increase, both as of their volume and as of their complexity (Strategic Plan, p.12). Through the years, the organization has managed to secure its effectiveness by employing a series of carefully designed plans and appropriate budgetary techniques, as explained below. The analysis of the financial ratios related to the organization’s performance also verifies the organization’s success in achieving its goals and objectives; of course, concerns in relation to the performance of certain organizational departments have not been avoided. 1.2 Financial Statement Analysis In order to evaluate the financial statements of an organization it is necessary to retrieve data related at least to two economic (concurrent) years of the particular organization, so that a comparison is feasible (Mohana 2011). Such comparison would also help to identify the firm’s weaknesses, in regard to its various operations (Gibson 2011). In addition, it is necessary to have access to different financial statements of the organization under examination; focusing only on Balance Sheet or other financial statement could lead to invalid assumptions regarding the organization’s actual financial performance (Bragg 2012). It should be noted that the financial analysis for Ann Arbor VA is based on the organization’s financial statements for the last 2 years, i.e. for 2011 and 2012. 1.2.1 Balance Sheet The firm’s balance sheet reveals a series of important facts for Ann Arbor VA (Figure 1, Appendix). The changes in the organization’s performance, as incorporated in its balance sheet are presented in Table 1 below. Financial Element/ Year 2012 2011 Fund balance with treasury $40,574 $40,211 Intra-governmental assets $50,722 $51,033 Intra-governmental liabilities $ 2,537 $2,999 Public liabilities $ 1,794,200 $1,561,362 Total liabilities $1,796,737 $ 1,564,361 Investments $9,309 $10,032 Total Assets $75,416 $74,063 Table 1 – key figures of the organization’s balance sheet In 2012 the organization had access to more funds than in 2011 (Table 1). This fact could lead to the assumption that in 2012 the firm’s intra-governmental assets, in total, would be increased. Still, no such increase was reported. In fact, in 2012, the firm’s intra-governmental assets, in total, were reduced (Table 1). This problem has been the result of the limitation in the investment made on the organization (Table 1), a fact indicating the decrease in the organization’s efficiency but also the inability of the organization to promote its operations in the market. However, the performance of Ann Arbor VA between 2011 and 2012 is also characterized by another phenomenon: the limitation of intra-governmental liabilities (Table 1). It could be assumed that the firm has been able to improve its market position, despite the limitation of its investments. Still, the increase in 2012 of the organization’s public liabilities has resulted to the increase of Ann Arbor VA’s total liabilities (Table 1). This increase in the organization’s liabilities is higher compared to the increase in the organization’s total assets (Table 1). If this problem is not resolved then in the future the organization would face significant difficulties with the achievement of its strategic goals, especially of its aim to improve on a continuous basis the services provided to its customers and to keep increasing the benefits for veterans and their families, as analyzed in Part Three below. 1.2.2 The Statement of Net Cost No indications are included in the organization’s Statement of Net Cost (Figure 2, Appendix) in regard to criteria on which cost is allocated; because of this reason it is quite difficult to decide which of the organization’s costs are fixed and which are variable. At this point, two different explanations could be given in regard to the organization’s costs: a) the organization operates in the healthcare services sector and its budget needs to be carefully developed so that the funds required for its operations are fully covered by the federal government; from this point of view, the organization’s costs would be fixed costs; b) however, the operating environment of the organizations tends to change continuously, as explained in section 1.1 above; for this reason, the organization’s costs would be rather variable. Financial Element/ Year 2012 2011 Net cost of the veteran’s health administration program $53,428 $52,521 Earned Revenue $ 3,460 $3,719 Gross Cost of the veterans’ health administration $56,888 $ 56,240 Cost of the veterans’ benefit administration $ 151,558 $70,850 Program’s costs $74,524 $ 69,777 veterans’ benefits Actuarial cost $78,700 $ 3,100 Operational Costs $355,857 $180,889 Table 2 – Key figures of the organization’s Statement of Net Cost In terms of their differentiation between the years 2011 and 2012, the costs of the organization could be analyzed as follows (Figure 2, Appendix): A) The net cost of the veteran’s health administration program has been increased in 2012 compared to 2011 (Table 2). This increase has been followed by the decrease: in 2012 the earned revenue of the organization was decreased (Table 2). At the same time, the gross cost of the veterans’ health administration was increased in 2012 (Table 2). It is derived that in 2012 the organization’s ability to manage effectively its costs in regard to its core function, the health administration of veterans, has been decreased. B) On the other hand, the cost of the veterans’ benefit administration has been highly increased in 2012 (Table 2). This increase has been based not so much on the program’s costs (Table 2) but rather to the significant increase in 2012 in the veterans’ benefits Actuarial cost (Table 2). Administration costs are way too high as well. It is implied that the increase of veterans’ benefits has become a priority of the organization. This practice could be justified since this target is among the organization’s goals, at the first level of the organization’s strategic plan, as analyzed in Part Three below. However, the veterans’ benefits cost has led to the significant increase in 2012 of the organization’s operational costs (Table 2). Even if aiming to achieve its strategic goals the organization should review its cost management principles so that its exposure to high risks to be avoided. For example, because of the increased needs for funds for covering the veterans’ benefits cost the organization should introduce a scheme for attracting more investments, so that a balance is secured between costs and revenues. 1.2.3 The Statement of Change in the Financial Position The organization’s Statement of Change in the Financial Position (Figure 3, Appendix) reveals that the firm’s position in its industry is not threatened; still measures need to be taken so that losses in income are controlled. Financial Element/ Year 2012 Net position in the beginning of period $ (1,502,346) Net position at the end of the period $ (1,725,452) Total Net position $ (1,721,321) Earnmarked Funds – beginning of the period $899 Earnmarked Funds – beginning of the period $745 Table 3 - Key figures of the organization’s Statement of Change in the Financial Position Indeed, in 2012, at the endof the period deterioration in the organization’s financial position is reported; indeed, the net position of the organization at the end of the period is (1,725,452). At the beginning of the period, the net position of the organization was $ (1,502,346) (Table 3). These figures are negative, i.e. they reflect a minus and not a surplus in the organization’s profits. After incorporating in the above figure the unexpected appropriations, a limitation in the losses of the organization has been achieved. The total net position of the organization for 2012 is improved, compared to the net position at the end of the period (Table 3). Indeed, the total net position of the organization for 2012 has been estimated to $ (1,721,321), compared to the $ (1,725,452) at the end of the period. For the earnmarked funds, i.e. those used for covering clearly specified organizational needs, a similar performance is reported. In the beginning of the period, these funds were higher compared to the end of the period (Table 3), a fact showing the organization’s failure in achieving both targets: in improving its net position and in increasing its earnmarked funds. 1.2.4 The Statement of Change in the Fund Balance The Fund Balance statement of Ann Arbor VA shows stability in the funds available for the realization of the organization’s projects (Figure 4, Appendix and Table 4, in-text). Financial Elements/ Year 2012 2011 Total Non-Entity Assets $112 $144 Total Entity Assets $40,462 $40,067 Total Entity & Non – Entity Assets $40,574 $40,211 Fund Balance $40,574 $40,211 Revolving Funds* $4,872 $4,309 Special Funds* $293 $272 Table 4 - Key figures of the organization’s Statement of Change in the Fund Balance * incorporated in Entity Assets The increase in the fund balance of the organization within two years, in 2011 and 2012, has been based on the increase of the organization’s Total Entity and Non-Entity Assets for the same period. Entity Assets incorporate certain categories of funds, such as ‘Trust Funds, Revolving Funds and Appropriated Funds’ (Financial Statements of Ann Arbor, p.27); in 2012 the Entity Assets of Ann Arbor VA were increased compared to 2011, reached the $ 40,462 (in millions). For the same period, i.e. between 2011 and 2012 the organization’s Non Entity Assets, especially the Fund Balance with Treasury, were reduced; this reduction did not affect the increase of the organization’s Total Entity Assets, due to the significant increase of Entity Assets, as analyzed above. PART TWO Principal source of revenue for Ann Arbor VA and the principle uses of this revenue Cash is the key source of revenue for Ann Arbor VA. In Ann Arbor VA cash is categorized as follows: a) Canteen Service and b) Loan Guaranty Program. In 2012 the level of the organization’s cash has been increased, reaching the $2, as compared to 2011 when it was estimated to $1 (Ann Arbor VA, 2012 Performance and Accountability Report, p.27). Still, a decrease was reported in regard to the Agent Cashier Advance; in 2012 the relevant cash was estimated to $14 while in 2011 it was $17; this fact led to a decrease in the organization’s total cash in 2012, at $16, instead of $18 in 2011. The investments of Ann Arbor VA are presented in Figure 5, Appendix section. The key destinations of the organization’s cash, in terms of investment, seem to be the intragovernmental securities and the public securities. Still, in 2012 the total investments of the organization have been decreased compared to 2011; in 2012 the amount invested had been $183 while in 2011 it was $191. The decrease in the organization’s cash, for the above period, is possibly a reason for the above phenomenon. PART THREE Presentation and evaluation of the Budget and Planning System used in Ann Arbor VA The strategic planning system of Ann Arbor VA incorporates a series of levels. The strategic goals of the organization constitute the first level of the company’s strategic planning system. Four strategic goals are considered as a priority (Strategic Plan, p.21): 1. the continuous improvement of the quality of healthcare services, 2. the increase of the benefits provided to veterans in regard to their health issues; for example, apart from the healthcare services, veterans have also access to ‘counseling, training and burial benefits’ (Strategic Plan, p.21), 3. to secure the organization’s readiness to face emergent health care problems, d) to keep customer satisfaction and employee motivation at high levels. The organization’s objectives are at the second level of the organization’s strategic plan, and they are categorized as follows (Strategic Plan, p.21-22): 1. to ensure that veterans and their families have access to all their benefits; in addition, the healthcare services provided to veterans and their families would be characterized by ‘quality, timeliness and responsiveness’ (Strategic Plan, p.22), 2. to secure for veterans and their families the availability of psychological support and consultancy (Strategic Plan, p.22), 3. to continuously increase ‘the efficiency and effectiveness’ (Strategic Plan, p.23) when addressing the needs of all the organization’s stakeholders. The organization’s goals and objectives can be achieved through a series of Integrated Strategies, 14 in total, which have been placed at the third level of the organization’s strategic plan (Strategic Plan, p.19. The Integrated Strategies of Ann Arbor VA are supported by appropriate strategic Initiatives, entitled as Major Initiatives, 16 in total; these initiatives are at the fourth level of Ann Arbor VA’s Strategic Plan (Strategic Plan, p.19). The success of these initiatives is guaranteed by a series of additional schemes, entitled as supporting initiatives, which also contribute in the achievement of the organization’s goals and objectives (Strategic Plan, p.25); the supporting initiatives are also at the fourth level of the organization’s strategic plan, below the Major Initiatives (see Graph 1, Appendix). The Strategic Plan of Ann Arbor VA, the key parts of which have been presented above, is the basis on which the organization’s daily operations and critical decisions are based. The Plan is clear, setting the organization’s role and values and indicating its priorities, based on the needs and expectations of its stakeholders. At this point, reference should be also made to the organization’s budgeting system. In general, the budget system of Ann Arbor VA can be characterized as Bottom-up, beginning at the level of the organization’s department and being approved by the Congress (VA Office of Budget, Generic Annual Budget Time Frame). The whole process is developed in four phases on annual basis: 1. From May to August of each year, discussions are developed within each department of the organization, the financial needs of each department are checked and the budget is prepared for submission (VA Office of Budget, Generic Annual Budget Time Frame). 2. From September to December the budget is reviewed by the OMB and it is prepared for submission to the Congress (VA Office of Budget, Generic Annual Budget Time Frame). 3. The first Monday of February and budget is submitted to the Congress; 4. By April the budget has been approved by the Congress (VA Office of Budget, Generic Annual Budget Time Frame). PART FOUR Analysis of the Balance Sheet and the Statement of Revenue and Expenses The Balance Sheet and the Statement of Revenue and Expenses are analyzed using a series of financial ratios. In this way, the organization’s strengths in weakness, as in practice, would be revealed(Moyer, McGuigan&Kretlow 2008). At the same time, the potentials of the organization to achieve a future growth could be estimated, at least at an average level (Friedlob & Welton 2008). Financial ratios are considered as the most effective tool for understanding an organization’s financial statements (Friedlob & Welton 2008). Among the financial ratios employed in the financial analysis process, there are certain that are considered as most critical; these ratios could help to understand the financial performance of Ann Arbor VA and the challenges that the organization has to face in its industry. A. Profitability Ratios 2012 2011 Comment/ Role of ratios A1. Return on Assets: Net Income/ Total assets 40,574/75,416= 0,538 40,211/74,063= 0,542* [same with D1 as there are taxes imposed on the revenue, so that total revenue is the same with net income] At what level the assets of a business contribute in its profitability B. Liquidity Ratios B1. Current Ratio: Current Assets/ Current Liabilities 75,416/1,796,737= 0,041 74,063/1,564,361= 0,047 A high current ratio indicates the limited involvement of the firm’s assets in development of the business C. Debt Management Ratios C1.Debt Ratio: Total Debts/ Total Assets 1,796,737/75,416= 23,824 1,564,361/74,063= 21,122 The level at which the business employees debt for enhancing its growth D. Asset Management Ratios D1. Total Asset Turnover: Total Revenue/ Total Assets 40,574/75,416= 0,538 40,211/74,063= 0,542 At what level the firms utilizes its assets successfully Table 5 – Key ratios related to the organization’s financial statements Based on the ratios presented in Table 5 above, the following facts are revealed in regard to the financial performance of Ann Arbor VA during the period 2011-2012: 1. In 2012 the ability of the organization to employ its assets for increasing its costs has been decreased, as revealed through the organization’s Return on Assets ratio (A1 element, Table 5); 2. The limitation of the role of the organization’s assets in the firm’s development during 2012 is also verified through the figures showing the Current Ratio of the organization for 2011 and 2012 (B1 element, Table 5); 3. In addition, it seems that, instead using its assets, the organization has tried to support its growth in 2012 mainly through debt, as the Debt Ratio of the organization shows (C1 element, Table 5); 4. The Total Asset turnover ratio of the organization for 2012 has been lower in 2012 (D1 element, Table 5). This means that in 2012 the ability of the organization to manage its assets has been decreased, a fact verified through the ratios presented above (A1, B1 and C1, Table 5). PART FIVE Discuss the future trends in Healthcare and their impact on Financial Management. The increased employment of advanced IT systems and communication technology is a key part of the efforts for the improvement of healthcare (Spekowius & Wendler 2006). Using such technology, the following trends could be promoted: ‘standardization, miniaturization and connectivity networking’ (Geisler, Krabbendam & Schuring 2003, p.16). The last decade, emphasis has been given on ‘the use of genetics and of small monitoring devices’ (Murray 2007, p.21), a trend that it is expected to be expanded further. Particular reference should be made to eMedicine, an electronic framework for developing a high range of healthcare tasks, such as diagnosis, prescriptions, monitoring of the patient’s progress and so on (Schimpff 2012). Recently, efforts have been made for the restructuring of US healthcare system; the ‘Patient Protection and Affordable Care Act, also known as Obama Care’ (Obama Care Facts 2013), was signed in 2010. The key aspects of the above Care Plan are the following: 1. People of ‘low or middle income’ (Obama Care Facts 2013) can seek for low cost Healthcare Insurance services; these services are available in online marketplaces, known as Exchanges (Obama Care Facts 2013); 2. The preventive healthcare services have been improved (Obama Care Facts 2013); 3. Particular emphasis is given on the quality of healthcare services provided to women and elderly (Obama Care Facts 2013). The cost of the Obama Care Plan is rather high, about $ 1.1 trillion but it is expected to lead to the limitation ‘of the national deficit by approximately $143 billions’ (Obama Care Fact 2013). The use of advanced technology systems in healthcare, as explained above, could help financial managers to retrieve easier the information required for managing the sector’s costs. As for the Obama Care Plan, its impact on Financial Management could be explained as follows: because of this plan, the number of people that would have access to healthcare services would be increased. The monitoring of Care Plan, as of the level of its costs, could be a challenging task. The update of existing practices for managing healthcare costs would be necessary for ensuring the feasibility of the Plan. References Affairs, U. D. (2013).VA- Mission, Vision, Core Values & Goals. Retrieved June 13, 2013, from U.S. Department of Veterans Affairs: http://www.va.gov/about_va/mission.asp Ann Arbor (2013) Organizational website. Retrieved from http://www.annarbor.va.gov/ Bragg, S. (2012). Financial Analysis: A Controller's Guide. Hoboken: John Wiley & Sons. Friedlob, G. &Welton, R. (2008).Keys to Reading an Annual Report. New York: Barron's Educational Series. Geisler, E., Krabbendam, K. &Schuring, R. (2003).Technology, Health Care, and Management in the Hospital of the Future. Westport: Greenwood Publishing Group. Gibson, C. (2011). Financial Reporting and Analysis: Using Financial Accounting Information. Belmont: Cengage Learning. Mohana, Rao (2011). Financial Statement Analysis and Reporting. New Delhi: PHI Learning Pvt. Ltd. Moyer, C., McGuigan, J. &Kretlow, W. (2008).Contemporary Financial Management. Belmont: Cengage Learning. Murray, P. (2007). Nursing Informatics 2020: Towards Defining Our Own Future : Proceedings of NI2006 Post Congress Conference. Amsterdam: IOS Press. Obama Care Facts (2013) ObamaCare Summary: A Summary of Obama's Health Care Reform. Retrieved from http://obamacarefacts.com/obamahealthcare-summary.php Schimpff, S. (2012).The Future of Health-Care Delivery: Why It Must Change and How It Will Affect You. Dulles: Potomac Books, Inc. Shim, J. & Siegel, J. (2007).Handbook of Financial Analysis, Forecasting, and Modeling. Chicago: CCH. Spekowius, G. &Wendler, T. (2006).Advances in Healthcare Technology: Shaping the Future of Medical Care. New York: Springer. Strategic Plan of Ann Arbor VA (2013) Retrieved from http://www.va.gov/performance/ Appendix Figure 1 – Balance sheet of Ann Arbor (source: Financial Statements, organizational website) Figure 2 – Statement of net cost of Ann Arbor (source: Financial Statements, organizational website) Figure 3 – The Statement of change in the Financial Position (source: Financial Statements, organizational website) Figure 4 – The Statement of Change in the Fund Balance (source: Financial Statements, organizational website) Figure 5 – Investment Securities in Ann Arbor VA (source: Financial Statements, organizational website) Figure 6 – 2014 budget breakdown for Ann Arbor VA (source: VA 2014 Fast Facts, organizational website) Read More