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Welcome to Mount Olive UniversityMount Olive Teaching Hospital
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Type: Confidential File
Name: Avalon County Hospital Merger Analysis
Includes 5 years of data from Avalon General Hospital and Mount Olive Teaching Hospital of Avalon County, Florida.
Objectives• Conduct a Quantitative and Qualitative analysis of Avalon General
Hospital
• Compare Avalon General’s key financial indicators with industry and Mount Olive Teaching Hospitals yearly report quantities
• Assess the consequential effects of external and internal environments
• Determine if Mount Olive Teaching Hospital should acquire Avalon General from Citrus Healthcare
• Timeline: 3 months Log Out
Avalon County Hospital Merger AnalysisOverview
• Avalon County of Florida • Three grand scale hospitals• Focus on operations of two not for profit hospitals • Hold 79% of the county’s licensed beds
• Provide similar services • Incorporation lasting over 150 years.
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MOUNT OLIVE TEACHING HOSPITAL• Highly regarded amongst medical schools
• It is staffed with a 3 to 1 Gp to specialist ratio
• The organizational culture
• The hospital has remained profitable over the years
• High revenue, tax benefits, government grants and yearly university tuition hikes.
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AVALON GENERAL• Owned by County
• Sold to Citrus Healthcare due to poor operating performance.
• Profitable and has completed various capital projects successfully.
• Staffed by a smaller number of general practice physicians.
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• Excess of .5 licensed beds per 1,000 population. • Industry- 2 beds per 1,000 population.• Admissions have fallen by over 5 %
• Avalon General-50% occupancy rate• MOTH-64.2% occupancy rate• Industry occupancy rate is 45.4%.
• The 547 total beds underutilized
Utilization
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Staffing
• MOTH physician’s - 170,000 average compensation. • Mount Olive’s FT nursing salary starts at 55,000 annually.
• 3 specialist to 1gp ratio. • Hospital does not need any more general practice physicians.
• Mount Olive could take a meager 5% of Avalon General’s nursing staff on a part time or on call basis.
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CFO Recommendations
• Invest in new technologies • Market competitive advantage service lines• Maintain their physician staff• Standardize business segments• Outsource • Revise policies related to charity care • Upgrade and improve clinical or information technology
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Discharge Dynamics
Avalon General• 11,412 Discharges• $143 PROFIT• AVG.LOS 5.5 days
Mount Olive Teaching Hospital• 19,748 Discharges• $613 PROFIT• AVG.LOS 6.6 days
The LOS industry average is 4.7 days with profits of 73 dollars.
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Cash Flows• Avalon General
• Net Income $1,720,000 • Net Cash Flow Provided by
Operating Activities $3,911,000• Net Cash Used in Investing
Activities 6,600,000• Net Cash Provided by (Used in)
Financing Activities($48,707,000)
• Mount Olive Teaching Hospital
• Net Income 12,997,000 • Net Cash Flow Provided by
Operating Activities$ 36,760,000• Net Cash Used in Investing
Activities 24,300,000• Net Cash Provided by (Used in)
Financing Activities($140,813,000)
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Difference in Working Capital
• Avalon General Working Capital 2004: 13.65• Avalon General Working Capital 2005: 8.40• Mount Olive Teaching Hospital 2004: 110.79 • Mount Olive Teaching Hospital 2005: 105.65
• Mount Olive maintains an extremely high amounts of working capital.
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Key Financial Indicators
• Avalon General• Total margin=2• Industry=5
• Return on equity=3• Industry:8.4• Less than industry average
• Mount Olive Teaching Hospital• Total margin=4• Industry=5
• Return on equity=5• Industry:8.4• Less than industry average.
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Key Financial Indicators
• In a merger, Mount Olive Teaching Hospital would incur Avalon General’s liabilities and assets.
• Debt/Equity ratio=81• 81% of equity is debt financed.
• Debt ratio=45• Higher than industry average, 45% of assets come from debt.
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Payer Mix
• It is likely that Mount Olive’s government payer mix would increase.
• Mount Olive’s government payer mix is 45%.
• Avalon General’s government payer mix is 69%.
• Likely that staff compensation will decrease.
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Percentage Changes
• Mount Olive net income for five years has remained positive with a 60% likelihood of increasing by 30%.
• Avalon General’s highest increases-outpatient services revenue • highest decreases -net income.
• Mount Olive - highest increases other operating revenue • Highest decreases-liabilities.
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Possible Financing Options
• Credit crunch resulting in access to capital being restricted.
• Difficulty accessing Tax exempts bonds.
• Reliance on own funding reserves, equity and patient revenues to fund projects.
• Plan to use 50% debt and 50% equity capital.
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Possible Financing Options
• CCC is 7%. • The average cost of each new dollar of capital is 7%. • The preferred rate of return is 10%. • 30 year tax exempt bond, it will pay 5.1% interest. • Cost of equity is 12%.
• Mount Olive Teaching Hospital can use all equity financing.
• Fund balance of 239,740 mil dollars.
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Final Decision
• Committee does not recommend a merger.
• Citrus Healthcare sets a high price for their flagship entity.
• The committee believes that the acquisition would simply be a takeover.
• Mount Olive is responsible for adhering to strict educational guidelines and structure.
• This would lead to 90 to 95% unemployment rate of Avalon’s staff.
• Mount Olive’s profits would suffer due to higher utilization, payer and uninsured mix.
•. Mount Olive is directly correlated with the University has no desire to be the one of the only hospitals in the region.
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Reference• Gapenski, L.C. (2006). Cases in
healthcare finance. 3rd ed. Chicago,Illinois:Health Administration Press.
• Healthcare Financial Management Association. (2004, September). How are hospitals financing the future? HFMA. Retrieved June 25, 2009, from http://www.hfma.org/NR/rdonlyres/67EAB5F4-609E-4549-BDC6-CBA216D2D1AA/0/FNF1_No6.pdf
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