Table of Contents
Executive summary
This study examines the financial statement of Envision Healthcare Company, one of the major healthcare providers in the United States. The analysis focuses on effects of changes of mixed payers to the organization’s financial performance. The report examines specific changes such as an increase in Medicaid and Medicare beneficiaries, effects of increasing staff turnover and the effects of increased demand for the healthcare services. Envision mainly depends on reimbursement for the services offered to contracted clients. The high cost of discounted services and low reimbursement than the estimated cost of services affects the financial position of the company. The organization can improve its financial performance by improving contracts negotiations and enhancing its asset base.
Introduction
This study evaluates the financial performance of the Envision healthcare organization based on the financial data for four quarters of the year 2006. The study aims to predict the changes in all financial metrics to changes in the organization’s proposed strategic plan in various scenarios. The respective scenarios include increases in Medicare from 50% to 70% and increase in Medicaid from 5% to 10% over one year period. The report also examines the effects of an annual increase in professional turnover from 5% to 10% (Annual report, 2016). Finally, it examines the effects of increase 20% increases in demand for services over a period of one year. The healthcare organization depends mainly on the services offered by the physicians to its clients. Also, the payment plan such as third-party payers affects the income for the organization.
Background of Envision Healthcare
Envision Healthcare was established on June 10, 2016, following the merger of two companies, AmSurg and Envision Health Holdings, Inc. (EHH). Envision Healthcare provides wide range of healthcare solutions nationwide including medical transportation services, ambulatory services and physician-led services. The physician services segment is the main source of income for the Envision Healthcare contributing to 63% of total income for the 2016 financial year. The medical transportation and ambulatory services segments contributed 24% and 13% of the total income for the organization respectively. The organization provides physician services in about 45 states through its 1,500 clinical departments (Annual report, 2016). Also, it serves about 4,100 contracts with medical transportation and offers ambulatory services to about 35 states of the United States. The organization had employed about 46,200 physicians and other healthcare professionals by the end of the year 2016.
Envision Healthcare is very competitive in the industry owing to a strong partnership with various providers of healthcare services and a team of qualified physicians. The organization has a strong financial base and a steady flow of income generated mainly from physician-led services (Fiscal Report, 2014). The payment for the services rendered to the clients constitutes the largest portion of organizations income. The sources of revenue for physician services constitutes fees from third-party payers and contract revenue. The total revenue fewer contract allowances and provisions for uncollectible constitute net revenue.
The organization recognizes its revenue after delivery of services and before the receipt of the payment. When estimating the expected revenue, the organization takes into consideration of various factors. The revenue estimate is usually based on the collection history, benefits delivered to specific patients based on their respective healthcare plan, fees and agreed payment rates regarding third party payers, and authorized payment rates under Medicaid and Medicare programs (Fiscal Report, 2014). The services charges for physicians fees includes fees charged directly to the clients, fees from third-party payers for the services rendered to the clients, and fees charged to the contracted hospitals for the services rendered to their clients. The revenue from Medicare and Medicaid for physician services in 2016 accounted for 20% and 08% of the total revenue from physician services respectively (Annual report, 2016). Other sources of revenue for physician services include commercial and managed care amounting to 54%, contract and other revenue of 17%, and self-pay revenue of 1%. During the same period, Medicare and Medicaid accounted for 28% and 12% of the total revenue generated by medical transportation. Also, the revenue from ambulatory services constituted of about 26% of government healthcare programs such as Medicaid and Medicare (FORM 10-Q, 2016). Other ambulatory services revenues include payment from other payers including commercial payers, patient co-pays, and deductibles.
The organization makes contracts with other hospitals, healthcare specialists as well as healthcare facilities to facilitate delivery of quality services to their clients. They get reimbursement from Medicaid and Medicare as well as other health insurance plans for the services rendered to the beneficiaries of respective plans. Additional payments are made directly by the recipients of the healthcare services. Government healthcare programs (Medicare and Medicaid) contributes approximately 28% of the total revenue for the Envision Healthcare organization (FORM 10-Q, 2016).
Healthcare organizations linked with third-party payers such as Medicaid and Medicare receive payment from the respective healthcare programs for healthcare services they offer to the beneficiaries of those plans (Haught et al., 2017). The organization may also receive additional supplemental payment offered as Disproportionate Share Hospital Payments (DSH) or other supplemental payments to add to Medicaid to cover the additional charges not captured by the insurance plan. These payments are supposed to cater for the cost incurred by the healthcare organization of providing medical services to their clients. The Medicare and Medicaid, therefore, provide an important source of income for the healthcare organizations (FORM 10-Q, 2016). Any change in total amount received by the healthcare organization in the form of Medicaid or Medicare will have a significant implication on the financial statement of the organization.
Predict the effect of changes in all financial metrics to changes in a proposed strategic plan in your chosen organization for the following three scenarios:
Payer mix changes from 50% Medicare and 5% Medicaid patients to 70% Medicare and 10% Medicaid patients in 1 year.
Envision Healthcare derives most of its revenue from the services offered to its clients. The payment is mainly made in the form of reimbursement by government health programs and other insurance programs. The organization offer three main types of services including medical transportation, physician services and Ambulatory service contracts. In 2016 financial year, the government healthcare programs contributed about 15% and 6% for Medicare and Medicaid respectively to the overall revenue of the organization (Annual report, 2016; 65). The other income comes from contract revenue earned from hospital customers other than from third-party payers, and other investments.
The amount billed to the third-party payers is usually lower than the actual amount received by the organization. The organization prepares its financial report based on generally accepted accounting principles of the United States. The accounting principles allow the organization to make an estimate for the expected revenue and include it in the financial statement (Fiscal Report, 2014). This implies the actual revenue could be lower than the amount stipulated in the financial statement.
Increasing the payer mix from 50% to 70% of Medicare and 5% to 10% for the Medicaid payers implies more revenue will be expected from government healthcare programs while the income from other payers will reduce (Haught et al., 2017). During the year ended 31st December 2016, the net revenue was $2,230 million. The Medicare program contributed to about 15% of the annual revenue ( the equivalent of $334.5 million). Increasing the payer mix from 50% to 70% of the Medicare patients implies the Medicare contribution to the annual organization revenue will increase from 15% to 21% (70/50*15%). The new income generated from Medicare program will be 21% of $2,230 million which is equivalent to $468.3 million. The Medicaid contribution to the organization’s income in 2016 was 6% or $133.8 million. The number of clients was equivalent to 5% of the number of payers. If the number increases from 5% to 10%, it will result in an increase of 12% (or $267.6 million) of the total Medicaid contribution to the organization’s revenue (Annual report, 2016).
The overall effect of the increase in the percentage of government healthcare payers on the organization’s revenue depends on whether the number of the other payers will decrease or remain constant (FORM 10-Q, 2016). Assuming the number of other payers remains unaffected the increase in Medicaid and Medicare contributions will result in an overall increase in total revenue of the organization.
Professional turnover goes from 5% annually to 10% annually.
Employees turnover refer to the rate at which employees leave the company either voluntarily or through termination by the employers. Employees’ turnover increases the cost of operating an organization because of lost productivity and the high cost of hiring other employees. According to Boushey and Glynn (2012), the cost of replacing an employee is approximately 40% of the employee’s annual salary. For professionals, the cost could even be higher due to the employee’s specialization. The organization has to incur a huge cost to provide training to the new employee to become effective (Cunningham et al., 2016). There is also huge cost due to lost productivity before the new employees become fully experienced with organizational processes.
Envision is highly dependent on the services offered by its physicians to the client. The cost of operations is very high due to huge wages and salaries paid to the employees. In 2016 the wages and salaries accounted for 73.2% of the total expenses, which was equivalent to $1,635.2 million. When employees turnover increases by 5% this means the cost of replacing the employees will also increase (FORM 10-Q, 2016). Assuming the cost of employee turnover is 40% of the annual wages and salaries, a 5% increase in employee turnover results in an increase of 0.02% of the total wages and salaries. This is the 40% cost of the 5% employee turnover. The turnover cost will increase from $32.7 million to $63.4 million. Consequently, the cost of operations will increase from $1,635.2 million to $1,667.9 million. However, the cost could even be higher depending on the position and specialization of the employee who has left.
Demand for services increases 20% in 1 year
Envision healthcare earns income from delivery of services. Increase in demand for services increases the revenue of the organization. The revenue is likely to increase by 20% or an equivalent of $445.6 million. In this case, the annual revenue will increase to $2,675.3 million. The operating cost will also increase though not in the same proportion. For instance, the wages and salaries may increase by ($326.5 million) the same proportion (20%) to $1,959.0 million from $1,632.5 million. Consequently, the total annual operating expenses will go up from $2,252 million to $2,578.5 million (FORM 10-Q, 2016). The overall benefit of an increase in services by 20% is an annual growth of net profit by $119.1 million. The increased earning will result in an increase of the organization’s assets due to increase in net earnings of $119.1 million.
Create projected financial statements to analyze effects of alternate operating assumptions on the firm’s financial condition
Projected financial Statement of income for the Envision Healthcare Company
| Year ended Dec. 31, 2017 | Year ended Dec. 31, 2016 | Year ended Dec. 31, 2015 | |
| Net revenue | 2,6116.4 | $2,229.7 | $1,336.8 |
| Operating expenses | |||
| Salaries and benefits | 1,959.0 | 1,632.5 | 947.2 |
| Supply cost | 9.1 | 6.2 | 2.4 |
| Insurance expenses | 83.1 | 77.2 | 50.0 |
| Other operating expenses | 231.5 | 164.4 | 95.3 |
| Transaction and integration costs | 72.4 | 49.0 | 6.6 |
| Impairment charges | 267.2 | 221.3 | – |
| Depreciation and amortization | 129.8 | 101.4 | 61.7 |
| Total operating expenses | 2752.1 | 2252.0 | 1,163.2 |
| Net loss on disposal & deconsolidation | – | – | (6.5) |
| Equity in earnings of unconsolidated affiliates | 8.2 | 4.1 | 9.7 |
| Operating income (loss) | (132.5) | (18.2) | 176.8 |
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In 2016 the company had an operating loss of $18.2 million due to the high cost of salaries and benefits for the physicians. The salaries and benefits of physician services are estimated to increase by 20% due to additional services offered by the physicians. The changes in the payer mix will increase revenue for the company, but at the same time, this will also increase the cost of operations. Also, the 20% increase in demand for the services contributes to increasing in revenue as well as the increase in the cost of offering the services (Fiscal Report, 2014). Furthermore, high rate of staff turnover has an effect of increasing the cost of operations. The overall outcome is an increase in total operating expenses and an increase in loss to the company than the loss suffered in 2016.
The projection of income from various activities is necessary for supporting the effects of changes payers for various healthcare programs. The income relates to Medicare and Medicaid beneficiaries receiving services from the Envision Healthcare Company (FORM 10-Q (2016). The organization makes estimates of the anticipated income from the various programs and include the projection in the financial statement. The organization should estimate the number of people likely to receive the healthcare services. The government reimburses the healthcare providers based on the number of persons served and the estimated cost incurred by the physicians to provide the services.
The projection of staff turnover and the implications of the turnover on the organization’s financial performance is based on the actual number of employees leaving the organization either voluntarily or involuntarily (Fiscal Report, 2014). The actual number of employees who leave the organization will require the organization to compensate the employees. Furthermore, the training required for new employees to boost their performance is used for estimating the cost of lost productivity.
Finally, the increasing demand for services by the employees is determined by the increase in a number of clients receiving various services from the organization throughout the period under consideration. The 20% increase in demand for services should be reflected in the number of clients under contract or relying on third-party payers.
The cost of providing additional services results in an additional operational cost to the organization. The government healthcare programs cover the basic cost incurred by the organization and any other reasonable cost determined by the program for reimbursing the healthcare service providers. The increasing cost of staff turnover requires strategic measures to upset the cost. The organization may require to improve its performance by reducing the cost of operations and enhancing delivery of services (FORM 10-Q, 2016). For instance, they can improve the contractual relationships with its clients and physicians to reduce the cost of operations. The company should increase its asset base to improve its financial operations. Also, they should invest in other income generating activities and reduce the cost of operations.
Conclusion
Envision Healthcare Company offer various services to its clients. The main services include Ambulatory Surgery Services, Physician-led services and medical transportation services. The clients include those relying on government healthcare programs such as Medicaid and Medicare, private insurance and non-insured clients. The organization is mainly dependent on services offered by the physicians. The analysis of financial data has established that increase in clients depending on the government healthcare programs will increase the income for the organization. However, the cost of providing physician services will also increase proportionately and may upset the gain to the organization. Furthermore, the increase in demand for the healthcare services will also increase the income generated by the company since service charges are the main source of income for the Envision Healthcare Company. However, the increase in staff turnover has adverse effects on the company’s financial performance because it the cost of replacing employees is very high. Also, the cost of lost productivity due to inexperienced employees could undermine the organization’s performance. The organization should strengthen its financial position by increasing asset base and ensuring effectiveness during the negotiation of the contract to avoid huge losses.
- Annual report, (2016). Envision healthcare Form 10-K: 1-141.
- Boushey, H. & Glynn, S. J. (2012). There Are Significant Business Costs to Replacing Employees. Centre for American Progress.
- Cunningham, P., Rudowitz, R., Young, K., Garfield, R. & Foutz, J. (2016). Understanding Medicaid Hospital Payments and the Impact of Recent Policy Changes. Retrieved from; http://www.kff.org/report-section/understanding-medicaid-hospital-payments-and-the-impact-of-recent-policy-changes-issue-brief/
- Haught, R., Dobson, A., DaVanzo, J. & Abrams, M.K. (June 23, 2017). How the American Health Care Act’s Changes to Medicaid Will Affect Hospital Finances in Every State. Retrieved from; http://www.commonwealthfund.org/publications/blog/2017/jun/how-changes-to-medicaid-will-affect-hospital-finances-in-every-state
- Fiscal Report, (2014). Financial Report. Center for Medicaid and Medicare Services.
- FORM 10-Q (2016). Envision Healthcare Holdings, Inc. – EVHC. Quarterly report with a continuing view of a company’s financial position