MMHA 6400 Week 11 Hospital Financial Analysis Example

Cash Waiting in the Billing Office: A Year-End Financial Analysis of Alder Bend Community Hospital

Student Name

Walden University

MMHA 6400: Healthcare Finance

Instructor Name

Month Day, Year

Cash Waiting in the Billing Office: A Year-End Financial Analysis of Alder Bend Community Hospital

Overview

Alder Bend Community Hospital remains profitable and moderately leveraged, but its cash position weakened this year because collections slowed while revenue grew. The hospital should fix the authorization denials behind its rising receivable days before committing cash to the second MRI scanner, and should revisit the scanner once days cash on hand are back above the board's 150-day floor.

Statements

Table 1 summarizes three years of results in thousands of illustrative dollars, drawn from the statements used throughout the course.

Table 1

Three-Year Summary (Dollars in Thousands)

Revenue grew 8.7% over two years, but expenses grew 9.9%, so operating income fell from $7.4 million to $6.0 million. Investment income kept the bottom line near $10 million each year. The striking line is receivables: they rose 32% over two years while net patient revenue rose 8.5%.

Ratios

Table 2 updates four of the Week 4 measures across three years.

Table 2

Selected Ratios Over Three Years

Days cash on hand rose last year with strong investment returns and fell this year as receivables absorbed cash.

Payer Mix

The hospital's payer mix has drifted toward lower-paying and more administratively demanding plans. Over three years, Medicare Advantage rose from 12% to 16% of gross revenue and Medicaid managed care from 14% to 17%, while commercial insurance fell from 30% to 25% and traditional Medicare from 40% to 38%. Self-pay held at 4%. Commercial payers pay the most per case, as the orthopedic analysis showed, so this drift explains part of the slower revenue growth. It also explains part of the receivables problem, because managed care plans, including Medicare Advantage plans, require prior authorization for more services than traditional Medicare does.

Revenue Cycle

Using measures defined in HFMA's MAP Keys (Healthcare Financial Management Association, 2024), the revenue cycle has weakened on each one examined. The initial denial rate, the share of claims denied on first submission, rose from 7.9% to 9.4% and then to 12.6%. Authorization-related denials grew from 31% of denials two years ago to 47% this year. Cash collected as a share of net patient service revenue fell from 99.1% to 95.2%, meaning the hospital collected less than it earned this year. Days in accounts receivable rose from 42.1 to 51.3.

These measures point in the same direction. Claims are being denied because services were delivered without the required authorization or with authorization that did not match the service billed. Each denied claim must be appealed or corrected and resubmitted, which takes weeks and sometimes fails. The growth of Medicare Advantage and Medicaid managed care volume, both of which rely heavily on prior authorization, has outpaced the hospital's front-end process for obtaining it. The cause is in patient access and scheduling, not in the billing office itself.

Two other explanations were considered and set aside. A coding backlog would lengthen the time between discharge and final bill, yet that interval has stayed near four days all year. Slower patient payments would show up in self-pay receivables, which have grown only in line with revenue. Neither accounts for the increase. The hospital's own denial logs, sorted by reason code, place nearly half of this year's denials in the authorization category, and the timing of the rise matches the growth in managed care volume quarter by quarter. That convergence of evidence is why the recommendation below starts with patient access rather than with collections staff.

Working Capital

One day of receivables at this year's revenue level is worth about $526,000 to the hospital. Bringing receivable days back to last year's 44.8 would free roughly $3.4 million; reaching 42 days would free close to $4.9 million. Releasing $3.4 million alone would add about 6.8 days of cash on hand, lifting the hospital from 149.6 days to roughly 156, above the board's floor. By contrast, paying $2.8 million in cash for the second MRI scanner now would push days cash on hand down to about 144. The scanner has a positive net present value, but its timing should follow the cash recovery, not precede it (Reiter & Song, 2021).

Recommendation

1. Fix the authorization process first. Assign authorization responsibility for scheduled imaging, surgery and infusion services to a central team, verify authorization before the service date, and track authorization denials weekly by payer and service. Target: an initial denial rate below 9% within two quarters and receivable days at or below 45 within a year.

2. Work the existing denials. Prioritize appeals of high-dollar authorization denials from the last 120 days, many of which can still be recovered.

3. Prepare for payer negotiations. The orthopedic contract with the largest commercial insurer expires in 18 months, and the shift toward managed care plans makes administrative terms, such as authorization requirements and timely payment, as important as rates.

4. Revisit the second MRI scanner when days cash on hand exceed 155 days, and consider financing it with an equipment loan rather than cash, since debt to capitalization has fallen to 31.6% and the hospital has borrowing capacity.

5. Report revenue cycle measures to the finance committee monthly, alongside the operating margin.

Hospital profitability depends on many factors outside management's control, including payer mix and local market conditions (Bai & Anderson, 2016). The revenue cycle is not one of them. It is the most direct lever Alder Bend has to restore its cash position, and pulling it first makes every later decision, including the scanner, easier to fund.

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

Healthcare Financial Management Association. (2024). MAP Keys: Revenue cycle key performance indicators. Healthcare Financial Management Association.

Reiter, K. L., & Song, P. H. (2021). Gapenski's healthcare finance: An introduction to accounting and financial management (7th ed.). Health Administration Press.