Week-4 Case Study
Hospital Corporation of America

SBNM 5311
Professor: Dr. Kasthuri Henry

Abstract The financial position of The Hospital Corporation from 1972-1981 was analyzed and compared with others in the industry through a careful examination of some critical ratios, along with competitors performances, we determined areas of concern for the organization. To accomplish this, we utilized various competitor benchmarks and compared them to the company’s overall past performance to determine the projected funding needed for The Hospital Corporation. From the analysis, the problems the organization is experiencing were identified and solutions are provided. From this, a recommended course of action for The Hospital Corporation was provided in an attempt to correct the company’s current trend. Keywords: Analysis, Ratio, Performance, Forecast, Competitor, Purchase, Capital

Identify problem Hospital Corporation has performed well over the past few years and has seen substantial growth. The growth it is experiencing has allowed the organization to have a total of 49,866 beds in service in 1981 producing $48,259 in revenue per bed. It grew from 188 hospitals in 1980 to 349 hospitals in service in 1981 producing 6.8 million dollars in revenue per location. The growth that it has seen has been profitable but compared to organizations like Humana it has not seen the same success. Humana has been able to produce better profitability results with few locations and beds. Currently Humana is see profit margins that double those of Hospital Corporation (Exhibit A). Looking at the comparison of these two locations it is clear that Hospital Corporation needs to identify why its margins are not where they could be.
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Another concerning area we noted focuses on the rate at which Hospital Corporation is growing. Because of its financial position and its Class A bond rating it is able to acquire capital at a very low rate. This has enabled Hospital Corporation to expand at levels that we argue is unmanageable. Growing over 30% over a year’s times while like organizations that are more profitable are showing growth rates around 7% tells us that some of these acquisition may not be in the best interest of the organization. Acquiring new locations will grow the company, but it does not ensure that it is profitable. A graph of the growth like competitor’s produced from 1980-1981 is provided below (Exhibit B).
Exhibit B
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As you can see Hospital Corporation grew almost double then its next closes competitor. This information is troubling when you look at like organization profit margins. Policy and Regulation changes will provide some challenges to Hospital Corporation. Policies moving away from hospitals being built only on a need basis could pose a competitor issues for Hospital Corp as well as promote over growth, which we feel has already started. By allowing hospitals to be built without regulation will impact the profitability of this industry through competition. Along with this, regulations on moving from a cost based system to a fixed rate system could also cause problems for Hospital Corporation if it is not managed properly (Schilling, 2015). The hospitals that price their services at levels that produce a profit, but are under the fixed rate will be successful. The ones that do not will lose money and profits by working with patients whom are on coverages like Medicaid and Medicare. The last area we feel that Hospital Corporation should be concerned about is financial goals. In looking at their current performance and using the goal that leadership has provided we determined that reaching the growth goal of 25% may be difficult to achieve (Schilling, 2015). I the information provided in Exhibit C we see that to see the growth Hospital Corporation needs we need to see a Return on Equity of 29.5% (Exhibit C).
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This calculates to an operating leverage of 82%. For this to take place a 13% improvement is needed in the operating leverage from its current position of 69%. With the changes to the regulations and the current rate of growth we do not feel this will be possible.
Offer solutions to the problem Hospital Corporation has seen success but it needs to look closely at the trouble areas identified above to maintain its position as a leader in the Hospital industry. Compared to some of the major players in this industry Hospital Corporation is not producing the strong profit margins other are seeing. To combat this and address two of the problems identified above we have determined that Hospital Corporation needs to do these two things. First, it needs to look closely at its acquisition and do a much better job of acquiring hospitals that have strong potential to be profitable entities. Growing at 30% over a year is concern and we have determined that profitability needs to be the main thing considered when it is decided to purchase different locations. The company should pass if their analysis does not validate that the hospital will be profitable even though that it is in a better position to acquire locations than its competitors (Schilling, 2015). Secondly, the organizational leadership needs to carefully assess the upcoming regulation changes and operating procedure to determine what needs to be done become more profitable. It is noted that through growth debt is experienced, but there is room for operational improvement with in Hospital Corporation. We recommend that Hospital Corporation does a complete competitor analysis to determine what other operations are doing to produce greater profitability. Then use this information combined with an internal analysis to determine areas that need attention. We recommend that Hospital Corporation does not over extend itself due to the changes in regulations moving away from the need based policy that was in place prior. We understand that Hospital Corporation is a good position to obtain capital to expand its facilities, but it should not use this regulation to over expand. Expansion will cause the industry to provide a more uniform pricing structure and market saturation does not lead to increased profits. Along with this, government program moving away from a cost based structure to a fixed pay structure will for medical services will only make increasing profits more difficult for Hospital Corporation we recommend that the company carefully looks at cost to provide these services and come up with a plan to make sure that these fixed payments from the government provide the operation with an opportunity to increase its profitability. Finally, we feel that the company and its upper management should revisit its financial goals for the future. Through our analysis we found that it may be difficult for the company to obtain their goal of 25% growth (Schilling, 2015). Developing a plan to allow for this goal to be obtained incrementally instead of in the shore time frame it is being expected to, will allow for the company to obtain its desired results in a much more realistic fashion. We feel that the goals themselves could be obtainable if the right changes are identified and corrected with in the companies operations. We also determined that Hospital Corporation should target a 60% debt ratio to maintain an A rating, even though it may cause the organization to increase its overall equity position (Schilling, 2015)
Develop criteria for solving the problem We approached this case through careful analysis of the company’s financial statement and competitive analysis with other like organization with in the same industry. With these tools, we noted differences in like competitors performance, conducted ratio analysis and calculated what it would take to reach all of the goals to determine obtainability. Utilizing the company’s current performance and comparing it to like organization we were able to determine a current trouble areas and offer a recommended course of action. We than looked at all of the possible recommendation we feel Hospital Corporations should consider and provide them with what we determined to the main area of concern to be. We then used this information and determined whether or not the company should seek out additional debt and how they should obtain it.
Apply the criteria to the offered solutions With the information we have gathered, we found that Hospital Corporation needs to first look at all of its future purchases in greater detail. It should determine the level in which the operation will be profitable and base the decision to purchase to on this. It should then look closely at its operations comparatively to other like operations. Operational best practices and cost saving measures should be noted and put into practice. Then they must look inward at how the operations are currently being run, from this determine if expenses are being managed properly and changes in regulations are not cause the company to remain profitable. The company should than develop a pricing model based off of the regulation that is profitable for the operation. Finally, they need to continue to seek out to meet the criteria for A bond status for capital and look strive to meet the organization financial goals but do so over extended period of time.
Recommendation
In the end, we make a final recommendation that Hospital Corporation scale back on the rate of which it is growing. Hospital Corporation is a successful company and has yielded great returns over time, but it profitability is not measuring up to the level of its competitors. Using it’s A bond status growth should continue, but its current mark of 30% we have determined that mistakes are being made by purchasing hospital’s that may not be in the proper position to yield the profit levels that Hospital Corporation should be seeking. Looking at like competitors we feel that Hospital Corporation should seek a growth rate of 15% and by doing this they will be able to have greater successes on acquiring only profitable operations.

References
Schilling, P. (2015).Hospital Corporation of America. In Financial Decision Making (pp. 129- 144). Chicago, Illinois: McGraw Hill.

Appendix A

Appendix B