HLTH 8430 Week 3 Financial Statement Analysis Paper Example

Reading Decisions From the Statements: Four Years of Harmon Valley Health's Audited Financial Statements and Notes

Student Name

Walden University

HLTH 8430: Healthcare Financial Management

Instructor Name

Month Day, Year

Reading Decisions From the Statements: Four Years of Harmon Valley Health's Audited Financial Statements and Notes

Introduction

Audited financial statements record decisions long after they are made, and often without saying that a decision was made at all. This analysis reads four years of Harmon Valley Health's statements and notes backward, from the numbers to the choices behind them. Harmon Valley is a composite two-hospital nonprofit system, and every figure here is rounded and illustrative. The analysis identifies three decisions that management has already taken: to defer capital replacement, to trade variable-rate debt for fixed-rate debt and to build liquidity beyond operating needs. For each, it cites the line or note that supports the inference, cross-checks against the Medicare cost report where possible and asks whether the decision was ever put to the board as a decision.

Four-Year Summary

Table 1 summarizes the figures used in the analysis.

Table 1

Harmon Valley Health, Selected Figures, Years 1 to 4 (Illustrative, $ Millions Unless Noted)

Decision One: Deferring Replacement

In each of the four years, capital spending fell short of depreciation, by between a quarter and a third. Over the period, Harmon Valley spent about $195 million on capital while recording about $284 million in depreciation. Over the same years, the average age of plant, calculated as accumulated depreciation divided by annual depreciation expense, rose from 11.2 to 13.6 years. Healthcare finance texts treat a capital spending ratio persistently below 1.0, combined with a rising average age of plant, as a sign that an organization is consuming its physical assets faster than it replaces them (Cleverley & Cleverley, 2018).

Read together, the two lines show a decision to defer replacement, sustained across four budgets. The decision had a purpose: it protected cash and days cash on hand during years of thin operating margins. It also had a cost that does not appear on the statement of operations. Older equipment carries higher maintenance and downtime costs, and deferred projects grow more expensive as construction prices rise. The fixed asset note shows that buildings and building improvements make up most of the gross plant, which suggests the deferral fell mostly on facilities rather than on short-lived equipment.

The Medicare cost report offers a cross-check. Hospitals that bill Medicare must file annual cost reports with financial and statistical data (42 C.F.R. § 413.20), including fixed asset and depreciation figures by department, and researchers routinely use these reports to compare hospitals' finances (Bai & Anderson, 2016). Harmon Valley's cost reports show the same rising depreciation with flat capital additions at both hospitals, confirming that the pattern is system-wide rather than concentrated at one campus.

Decision Two: Trading Expected Cost for Certainty

Long-term debt rose in Year 3 and fell again in Year 4, which on the face of the balance sheet looks like ordinary borrowing and repayment. The long-term debt note tells a different story. In Year 3, Harmon Valley refunded a series of variable-rate demand bonds with fixed-rate revenue bonds, paying a modest premium and incurring issuance costs, and terminated an interest rate swap that had partly hedged the variable-rate debt. The temporary rise in debt reflects the overlap between issuance and redemption.

That is a decision to accept a higher expected interest cost in exchange for certainty. Variable-rate debt usually carries a lower rate on average but exposes the borrower to rising rates and to the need to renew the bank facilities that support it. Fixed-rate debt removes both risks at a price (Gapenski & Reiter, 2016). For a system with thin operating margins, certainty may well be worth the price, but it is a choice about risk appetite, and the note discloses the terms without saying whether the board weighed the trade.

Decision Three: Building Liquidity for Lenders

Board-designated investments grew from $540 million to $700 million, faster than operating expenses, and days cash on hand rose from 175 to 212. Part of the growth came from investment gains, visible in the nonoperating line. But the investment note shows that the board also transferred operating cash into designated funds in Years 3 and 4, and the debt note shows that the new fixed-rate bonds include a covenant to maintain at least 100 days of cash on hand.

The pattern reads as a decision to build liquidity well beyond the covenant and beyond operating needs, most plausibly to support the system's credit rating and borrowing costs. That decision interacts with the first. Cash that could have funded deferred capital replacement was instead held in reserves. A board might reasonably prefer reserves to new buildings, but the two choices are linked, and the statements present them in different notes.

Were These Choices Put to the Board?

None of the three decisions appears in the statements as a decision. Each is visible only by reading two lines together, or a line with a note. The board minutes, which are outside the audited statements, would show whether the board approved capital budgets below depreciation knowing they deferred replacement, whether it weighed the cost of fixed-rate refunding against the risk it removed and whether it chose to build reserves at the expense of capital. This analysis recommends that the finance committee ask management to present each of these as an explicit trade-off in the next capital and financing plan, with the capital spending ratio, average age of plant and days cash on hand shown together, so that the next four years of statements record choices the board actually made. The same three figures could be added to the committee's quarterly dashboard at little cost, since each is already calculated for the audit or the cost report.

References

Bai, G., & Anderson, G. F. (2016). A more detailed understanding of factors associated with hospital profitability. Health Affairs, 35(5), 889-897. https://doi.org/10.1377/hlthaff.2015.1193

Cleverley, W. O., & Cleverley, J. O. (2018). Essentials of health care finance (8th ed.). Jones & Bartlett Learning.

Financial data and reports, 42 C.F.R. § 413.20 (2024).

Gapenski, L. C., & Reiter, K. L. (2016). Healthcare finance: An introduction to accounting and financial management (6th ed.). Health Administration Press.