Financial Analysis of Alternative Health Care Firms Class 7, 2/21/02

1. Financial Analysis of Alternative Health Care Firms Class 7, 2/21/02 • Long-Term-Care Facilities and Nursing Homes • Medical Groups • Health Plans

2. Long-Term-Care Facilities and Nursing Homes • In 1997 there were 16,700 Nursing Homes in the US reporting revenues of $82.8 billion, 38% paid by private individuals or insurers, 62% paid by either the federal or state governments. • Size of the industry heavily regulated by states • Dependent on government policy governing payments for long-term-care. • 55% are members of national chains, 45% independent.

3. Notable characteristics of LTC Financials • 55% of expenditures are for wages, salaries and benefits paid to employees. • How depreciation is listed under other expenses. • Accounting for the contributions to ‘Entrance fee funds’ that are required for membership in a CCRC. • Illustrating the accounting and profitability of CCRCs.

4. Medical Groups • In 1997, medical practices reported revenues of $217.6 billion 66% paid by private sources and 34% by governments. • Tendency for physicians to join larger medical groups. • Physician contacts per person are increasing at all age categories. • Population aging contributes to increased utilization of physician services.

5. Alignment of Medical Groups • With other medical groups • By joining or forming an IPA • By merging with other Medical Groups • With hospitals • By participating in a hospital-sponsored PHO • By selling medical practice to a MSO • With health plans • By contracting directly with a HMO health plan • With physician practice management firms • By selling medical practice to a for-profit PPM firm.

6. Notable characteristics of Medical Group Financials • The separation of expenses into two categories: Operating expenses and physician expenses. • The likelihood that net profits of a hospital owned Medical Group - perhaps a MSO- would expect to run at a loss. • The implications of large negative balance in a medical groups Retained Earnings accounts.

7. Health Plans • Variety of incorporated firms licensed to offer health insurance plans. • Commercial • Public service corporations • Corporations licensed by feds to offer self insure health plans they offer to employees • Kinds of Health plans governments license these firms to sell. • Indemnity • Managed Care • Self-insured

8. Trends in Health Plans • Increase in the cost of health insurance plans • Increase in the population not covered by health insurance • Increase in health plans that offer POS option • Increase in the popularity of health plans built around PPO as opposed to HMO arrangements.

9. Hospital owned HMO Plan (Health Central or Health Guard) • 75% of assets are current assets • 8% of assets are property and equipment. • Importance of managing cash. • Incurred but not reported claims (IBNR) • Reported to be the major accounting challenge faced by managed care plans. Considered a major factor in the bankruptcy of Harvard Pilgrim Health Care Plan.