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The Early Indicators of Financial Failure: A Study of Bankrupt and

Solvent Health Systems

Article  in  Journal of healthcare management / American College of Healthcare Executives · September 2008

DOI: 10.1097/00115514-200809000-00010 · Source: PubMed

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The Early Indicators of Financial
Failure: A Study of Bankrupt and
Solvent Health Systems
Joseph S. Coyne, DrPH, director, Center for International Health Services Research
and Policy, and professor, Washington State University, Spokane, and Sher G. Singh,
research associate, Center for International Health Services Research and Policy,
Washington State University, and visiting professor, City University, Beijing, China

EXECUTIVE SU M M ARY
This article presents a series of pertinent predictors of financial failure based on
analysis of solvent and bankrupt health systems to identify which financial measures
show the clearest distinction between success and failure. Early warning signals are
evident from the longitudinal analysis as early as five years before bankruptcy.
The data source includes seven years of annual statements filed with the Securi-
ties and Exchange Commission by 13 health systems before they filed bankruptcy.
Comparative data were compiled from five solvent health systems for the same
seven-year period. Seven financial solvency ratios are included in this study, includ-
ing four cash liquidity measures, two leverage measures, and one efficiency measure.
The results show distinct financial trends between solvent and bankrupt
health systems, in particular for the operating-cash-flow–related measures, namely
Ratio 1: Operating Cash Flow Percentage Change, from prior to current period;
Ratio 2: Operating Cash Flow to Net Revenues; and Ratio 4: Cash Flow to Total
Liabilities, indicating sensitivity in the hospital industry to cash flow management.
The high dependence on credit from third-party payers is cited as a reason for this;
thus, there is a great need for cash to fund operations. Five managerial policy impli-
cations are provided to help health system managers avoid financial solvency prob-
lems in the future.

For more information on the concepts in this article, please contact Dr. Coyne at
jsc@wsu.edu.

333
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J o u r n a l of H e alt hca re Ma n age me n t 53 :5 S e p te m be r /Oc tobe r 2008
H ealth systems routinely compare
their financial results to those of
a peer group of healthy competitors.
Although managers of most organiza-
tions strive to achieve the outcomes of
comparable healthy competitors, it is
equally important to examine those of
unhealthy competitors. By doing so,
managers can learn from their mistakes
and know what to avoid in the future.
All C-level managers (chief executive
officers, chief financial officers, and
chief operating officers) should ask the
following questions on a quarterly
basis:
• Are we financially on track with
similar healthy companies, or are we
headed for failure like some insolvent
companies?
• Are certain ratios more sensitive and
predictive of financial failure than
traditional ratios used to describe
healthy health systems?
• What type of indicators (cash based or
accrual based) serves as early warning
indicators of any financial solvency
problems?
Health system managers should
expand their horizons to include indica-
tors of success and failure. Trends in cer-
tain financial ratios are clearly distinct
between solvent health systems and
comparable bankrupt companies in the
same industrial sector. This difference
enables a company to determine if it is
on a solvent or insolvent track.
This article presents a series of
pertinent predictors of financial failure
based on analysis of solvent and bank-
rupt health systems to identify which
financial measures show the clearest
334
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distinction between success and failure.
The results are a longitudinal analysis
presented for a seven-year period before
bankruptcy. Early warning signals are
evident from the longitudinal analysis
as early as five years before bankruptcy.
Managerial policy implications are
offered to help health system managers
ensure financial solvency in the future.
R e l a t e d S o lv e n c y S t u d i e s
Boblitz (2006, 48) uses the greater
Richmond area in Virginia to demon-
strate that some hospitals should use
market intelligence data for additional
growth information as an effective
supplement to historical growth data.
If an organization is not looking out-
side its own historical data to assess
its financial performance, then it is
“missing out on some larger realities”
(Boblitz 2006, 53).
In comparing the healthcare in-
dustry with non-healthcare industries,
Young and Ballarin (2006) analyze a
failed firm, the Rural Health Associ-
ates (RHA) in Maine. They conclude
that failure is a result of not engaging
in strategic partnerships. The authors
contend that RHA (and similar health-
care organizations) could have survived
by focusing on one area of expertise,
instead of spreading itself over too
many areas. Furthermore, hospitals
have often neglected to “close the gap
between perceived and real environ-
ments” (Young and Ballarin 2006, 177).
The authors recommend that hospitals
should engage in seven strategic steps to
attempt to close this gap:
1. Reward innovation.
2. Anticipate and embrace failure.
 T he Ea r l y I ndi ca tor s of Fi na n ci a l Fa i l ur e
3. Require exposure to ideas from out-
side the firm.
4. Distinguish between available
resources and customer needs.
5. Produce an environment of conflicts.
6. Encourage employees to question
existing rules and assumptions.
7. Develop a culture that supports new
ideas and differing points of view.
If hospitals were able to meet some
of these goals, as non-healthcare busi-
ness organizations strive to do, the
authors contend they would not only
be able to satisfy the demands of the
changing population but also focus on
true (rather than perceived) strengths,
weaknesses, opportunities, and threats.
Coyne (1985) compares the mul-
tihospital systems with the investor-
owned (IO) and not-for-profit sectors
using several key financial ratios. The
study shows that cash liquidity is the
most sensitive measure of solvency in
the hospital systems studied. The author
points out that the solvency of these
hospital systems is tested during periods
where systems stretch to reach addi-
tional patient populations through price
discounting and contract negotiations
for new market share. This comparative
study showed that IO hospital systems
reported two times the cash liquidity
of the not-for-profit hospitals systems.
Greater access to capital is the reason for
this difference in the solvency of the two
ownership types.
Cleverley and Baserman (2005)
examine the top five IO systems and the
top five voluntary systems in the health-
care arena. Audited financial statements
of each institution were analyzed to
335
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address specific issues. The study showed
that IO systems reported debt to equity
ratios more than twice that of voluntary
systems (Cleverley and Baserman 2005,
362). On the other hand, even though
voluntary systems have the advantage of
access to lower-cost tax-exempt debt that
IOs do not, their primary purpose is not
the enhancement of their ROE [return
on equity]” (Cleverley and Baserman
2005, 362). Voluntary systems engage in
more variable-rate financing than IOs,
but it is not exactly clear why. Addition-
ally, both ownership types were equally
likely to use interest rate swaps as a capi-
tal cost management vehicle (Cleverley
and Baserman 2005, 364). Cleverley and
Baserman found a significant difference
in cash and investment reserves between
the two types of systems. They note
that this is not entirely surprising as IO
systems depend on debt and equity fi-
nancing for capital replacement and can
raise capital quickly by issuing shares
of stock. On the other hand, voluntary
systems rely on their accumulated cash
reserves to fund capital replacements
and have only limited opportunities to
generate additional capital.
Coyne and Meadows (1991) ex-
amined the early warning signals of
financial failure in a study of Califor-
nia health maintenance organizations
(HMOs). The study found cash mea-
sures of liquidity to be the superior pre-
dictor of insolvency in the study popu-
lation of bankrupt HMOs. The authors
recommend that policymakers should
monitor these measures of solvency on
an ongoing basis to avoid bankruptcies
from occurring in the future.
In analyzing the Allegheny Health,
Education, and Research Foundation
J o u r n al o f H ea lt hca re Ma na ge me n t 53 :5 Se p te m ber /Oc tobe r 2008
(AHERF) bankruptcy, which was the
largest healthcare bankruptcy in U.S.
history, the researchers examined how
this bankruptcy affected tax-exempt
bond issues (Carpenter, McCue, and
Moon 2003, 17). The authors hypoth-
esized and tested whether or not the
AHERF economic failure had a direct ef-
fect on hospital-issued bonds. Thomson
Financial, American Hospital Associa-
tion, Health Care Financing Administra-
tion, and Area Resource File provided
their data. The authors analyzed 442
new tax-exempt revenue bonds, 319
of which were issued after the AHERF
bankruptcy. Based on two logistic re-
gression analyses, they concluded, “the
AHERF bankruptcy had a substantial ad-
verse effect on the hospital, tax-exempt
bond market” (Carpenter, McCue, and
Moon 2003, 27).
Cleverly (2002) argues that if
boards of directors look more closely at
financial data, using methods such as
the financial strength index, they will
be able to take preventive measures to
avoid financial collapse. He analyzes
two cases, Enron and Nyack Hospitals,
where had the boards looked at their
profitability, liquidity, financial leverage,
and age of physical facilities they would
have foreseen financial problems. Clev-
erly suggests that hospital management
and boards use simple measures of fi-
nancial health, like the financial strength
index, and not rely solely on audits. Au-
ditors should be more definitive in their
audits, hospitals should hire an outside
party to evaluate their financial health,
and board members should be better
educated regarding healthcare finance
to increase their chances of preventing
financial collapse (Cleverley 2002).
336
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Robinson (2002) compares the
financial status of the for-profit and
not-for-profit hospital industries. He
reports that high stock prices are driving
for-profit institutions to expand, invest,
and improve operation, and low bond
ratings are feeding the already urgent
problem of not-for-profits, including
poor structures and equipments, poor
admissions, difficulty raising capital,
and growing deficits. Robinson states
that hospitals need to focus on several
strategies for the future: (1) rebuild-
ing, (2) merging and acquiring, and
(3) diversifying. Equity investors and
junk-bond creditors are expecting “high
rates of growth in revenues and earn-
ings” (Robinson 2002, 112). The author
predicts that for-profit hospital systems
are going to grow at the expense of
not-for-profits. Robinson also states that
the hospital industry is moving away
from administered prices, tax subsidies,
certificate-of-need barriers to entry, and
local control toward a combination of
administered prices, corporate tax of
the bottom line, competition springing
up from single-specialty startups, and
control of integrated delivery networks
(Robinson 2002, 116).
Methods
The financial trends of 30 failed public
health systems that reported total assets
of $60 million or greater are identi-
fied as the study population from the
bankruptcy reports (Bankruptcy Year-
book and Almanac 2003, 224). Of the
30 failed health systems, 13 provided
complete data for all the study variables
for a minimum of three years before
bankruptcy. The 13 study health systems
are American Health Care, Care Matrix,
 T h e E a r l y I nd i c a tor s of Fi na n ci a l Fa i l u r e
Coram Healthcare Corporation, Gen-
esis Health Ventures, Healthcor Hold-
ings Inc., Integrated Health Services,
Magellan, Manner Health Group, New
American, Omda Healthcorp, Paracelsus
Healthcare Co., TLC Healthcare Services,
and Unison Healthcare Co.
The data source includes seven years
of annual statements filed with the
Securities and Exchange Commission
(SEC) before the 13 health systems filed
bankruptcy (Securities and Exchange
Commission 2007). Comparative data
were compiled from the following five
solvent health systems for the same
seven-year period (1998–2004) before
the 13 failed systems filed bankruptcy:
HCA, HMA, Humana, LifePoint, and
Universal.
With respect to conducting any
comparative analysis of the bankrupt
versus healthy companies, it is impor-
tant to note the size differences. Among
the 13 bankrupt health systems, the
average assets were $1.3 billion and the
median assets were $437 million, with
a range of $71 million for the smallest
bankrupt company (Healthcor Hold-
ings Inc.) and $5.4 billion for the largest
bankrupt company (Integrated Health
Services). Among the five healthy com-
panies, the average assets were $6.9 bil-
lion (approximately five times the size
of the average for the bankrupt health
systems), and the median assets were
$3.5 billion (approximately eight times
the size of the median bankrupt com-
pany.) This is a range of $877 million
for the smallest healthy company (Life-
Point) and $21.5 billion for the largest
healthy company (HCA). Although
these size differences are noteworthy,
the seven solvency indicators avoid the
337
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problems of direct comparisons of the
specific line items of the financial state-
ments. Indeed, solvency indicators are a
measure of financial viability relative to
the financial results for a given company
at a given point in time.
Given that monitoring cash flows
provides optimal data for identifying
potential bankrupt health systems, five
of the seven solvency ratios consider
cash flows in this longitudinal analysis.
The following seven ratios from the au-
dited financial statements as filed with
the SEC are included in this study (for
more detailed financial solvency ratio
definitions, see Table 1):
1. Annual Operating Cash Flow
Percentage Change from Prior to
Current Period: A cash-flow-based
measure to assess the change in the
annual operating cash flow gener-
ated during the past year with an
industry average of 8.3 percent.
2. Operating Cash Flow to Net Rev-
enues: A cash-flow-based measure
of the year-end operating cash flow
relative to net revenues.
3. Days of Cash On Hand: A cash-flow-
based measure of the length of time
a company can continue to oper-
ate, given current cash balances and
current average daily cash outflows;
the industry average is 31 days, or
approximately two pay periods.
4. Cash Flow to Total Liabilities: A
cash-flow-based measure of the rela-
tive amount of the operating cash
flow balance to the total liabilities
owed to lenders as of year-end.
5. Debt to Equity: An accrual-based
measure of the total debt relative to
J o u r na l o f H ealt hca re M an ag eme n t 53 : 5 Sep te mbe r / Oct obe r 20 08

TA B LE 1
Definition of Financial Ratios

Ratio Industry
No. Ratio Title Ratio Type Numerator Denominator Average*

1 Operating Cash Cash Current to Previous operating 8.3%

Flow Percentage liquidity previous cash flow
Change, from operating cash
Prior to Current flow
Period
2 Operating Cash Cash Operating cash Net revenues N/A
Flow to Net liquidity flow
Revenues
3 Days of Cash on Cash Cash + [Operating expenses 31.00
Hand liquidity Marketable – Depreciation
securities – Amortization] / 365
4 Operating Cash Cash Operating cash Total liabilities N/A
Flow to Total liquidity flow
Liabilities
5 Debt to Equity Leverage Total debt Owner’s equity 73%
6 Debt Service Leverage [EBIT + Interest expense + 2.3
Coverage Depreciation] (Principal repayment)
/ (1-Tax rate))
7 Days of Efficiency Accounts Net revenue /365 64 days
Receivables receivable

*Source: Gapenski, L. 2007. Understanding Healthcare Financial Management, 5th ed. Chicago: Health Administration Press.
N/A = Not available

total equity; the industry average is organization; the industry average is

73 percent.
6. Debt Service Coverage: A cash-
flow-based measure of the year-end
estimate of cash flow relative to debt
service (principal plus interest); the
industry average is 2.3 times.
7. Days in Accounts Receivables: An
accrual-based measure that indi-
cates the average collection period
on amounts owed to the healthcare
64 days.
The seven ratios are calculated us-
ing the audited financial statements,
as filed with the SEC, for the bankrupt
and solvent health systems. The median
value is computed for each year for both
bankrupt and solvent health systems.
The aim of this analysis is to compare
the results for bankrupt and solvent
health systems to determine the early

338
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 T h e Ea r ly I ndi ca t or s of Fi n a nc i a l Fa i l ur e
indicators of financial failure for the
period of seven years before bankruptcy.
Annual data for the solvent health
systems are collected for the seven-year
period before the bankruptcy of the
bankrupt health systems (see Figures 1
through 3).
R e s u lt s
The results show distinct financial
trends between solvent and bankrupt
health systems, in particular for the
operating-cash-flow–related measures,
Ratio 1: Operating Cash Flow Percent-
age Change, from prior to current
period; Ratio 2: Operating Cash Flow to
Net Revenues; and Ratio 4: Cash Flow
to Total Liabilities, indicating sensitiv-
ity in the hospital industry to cash flow
management. This indicates greater
sensitivity to and higher importance of
cash-flow management in the healthcare
industry. Given the high dependence on
credit from third-party payers, such as
Medicare, Medicaid, and private insur-
ers, there is a greater need for cash to
fund operations. Indeed, Jordan (2001)
documents how these public payers and
HMOs negatively affect the profitability
and net worth of New Jersey hospitals.
Ratio 1—Operating Cash Flow
Percentage Change—shows the dramatic
drop in cash during the three years
before filing bankruptcy, as witnessed
by the median values for the failed
health systems of –28 percent, –30
percent, and 5 percent, respectively (see
Figure 1). This is significantly below
the industry average of 8.3 percent. In
comparison, the five solvent health
systems reported Operating Cash Flow
Percentage Change rates of 20 percent,
-6 percent, and 37 percent for the same
339
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period. These differences between the
bankrupt and solvent health systems un-
derscore the importance of this measure
for monitoring the financial solvency of
health systems.
Ratio 2—Operating Cash to Net
Revenue—shows bankrupt health sys-
tems consistently at or below 5 percent
for the seven years before bankruptcy
(see Figure 1). In comparison, the five
solvent health systems reported a mini-
mum of 9 percent for the same period.
As with Ratio 1, the differences between
the bankrupt and failed health sys-
tems underscore the importance of this
measure for monitoring the financial
solvency of health systems.
Ratio 3—Days of Cash on Hand—
shows no distinct differences between
solvent and bankrupt health systems
(see Figure 1). Note that two of the
solvent study health systems (HCA and
Universal) consistently reported single-
digit values for this ratio. The median
values of both bankrupt and solvent
health systems are well below the indus-
try average of 31 days throughout the
study period, at approximately half the
industry average from five years before
bankruptcy.
Ratio 4—Operating Cash Flow
to Total Liabilities—shows bankrupt
health systems at less than 8 percent
and solvent health systems at greater
than or equal to 14 percent (see Figure
1). Although the number of bankrupt
health systems that reported results for
this ratio is limited (compared with the
other ratios), except in years 1 and 2
before filing bankruptcy, the compari-
son with solvent health systems is likely
indicative of the financial stress among
the bankrupt health systems. Indeed,
Jou r nal of H e a lt h c a r e M a n a g e m e n t 5 3 : 5 Sept ember/Oct ober 2008

FI G URE 1
Median Values for the Four Cash Liquidity Ratios for a 7-year Period for 13 Bankrupt Health Systems
and 5 Solvent Health Systems

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 T h e Ea r ly I ndi ca t or s of Fi n a nc i a l Fa i l ur e

FI G URE 2
Median Values for the Two Leverage Ratios for a 7-year Period for 13 Bankrupt Health Systems
and 5 Solvent Health Systems

FI G URE 3
Median Values for the Efficiency Ratio for a 7-year Period for 13 Bankrupt Health Systems
and 5 Solvent Health Systems

341
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Jo u r n a l o f H ea lth car e Man ag e men t 5 3: 5 Se p te m be r / Oc tobe r 200 8
the lack of attention to this ratio may be
worth reevaluating.
Ratio 5—Debt to Equity—shows
similar values for the four years before
bankruptcy (see Figure 2). Several po-
tential explanations address this con-
vergence in ratio values for the healthy
and bankrupt health systems. First, note
the operational definition of this ratio:
a leverage measure of the total debt rela-
tive to total equity. As bankruptcy nears,
the sequence of events begins with cash
dwindling to near zero, failure to meet
lender liquidity and collateral require-
ments precipitates lenders calling issues
of long-term debt as due and payable,
then followed by the cash-strapped
company turning to major investors
and board members for short-term
bridge loans to meet salary and vendor
requirements. Although the median
values of debt to equity are quite similar
in value one year prior to bankruptcy,
the number of negative values of this
ratio among bankrupt health systems is
almost half of the reporting bankrupt
health systems (6 out of 13), compared
with no negative values for the healthy
companies.
Ratio 6—Debt Service Coverage—
shows no distinct differences between
bankrupt and solvent health systems
until three years before bankruptcy (see
Figure 2). In comparison to the indus-
try average of 2.3, the solvent health
systems showed a drop during years 5
and 4 to 1.79 and .87, respectively, but
remained at or above 5.74 during years
3 through 1. Bankrupt health systems,
on the other hand, reported 0.93, then
four years prior 0.85, and three years
prior 0.84. In the two years before bank-
ruptcy, Debt Service Coverage increased
342
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among the bankrupt health systems to
1.42 in year 2 before bankruptcy and
1.55 to the year before bankruptcy. To
explain this increase in values during
the last two years of operation for the
bankrupt health systems, note the oper-
ational definition of Ratio 6: the year-end
estimate of cash flow relative to debt service
(principal plus interest). The increase may
be explained by gain on sale of facilities,
major expense reduction through large-
scale layoffs of employees, debt-service
reductions through capital reorganiza-
tion programs, and conversions to lease
agreements (from purchase agreements)
of plant, property, and equipment.
Ratio 7—Days Accounts Receiv-
ables—shows that solvent health
systems have maintained stability of 48
days on average for the past five years,
which is well below the industry average
of 64 days (see Figure 3). Conversely,
bankrupt health systems show sig-
nificant volatility, indicating a lack of
control of this important area. Thus, al-
though no noticeable difference can be
seen on the graph, the consistent value
of solvent health systems may indicate
more effective and successful manage-
ment control over collections.
Discussion and
Conclusions
The results of this comparative analysis
examine bankrupt versus solvent health
systems in a seven-year period before
bankruptcy filing. Perhaps an easy les-
son here is to place value on historical
data, as Kirby and colleagues (2006)
found in their study about access to care
using a seven-year time frame. Others
have argued that it is important to “look
back twice as far as you look forward”
 T he E ar ly I ndi ca to rs o f Fi na nci a l Fai lur e
(Saffo 2007, 129). When analyzing the
historical data of the failed health sys-
tems, critical differences are evident for
three of the seven measures of financial
solvency, all of which relate to cash
management. Traditional measures of
financial performance related to debt
and receivables management did not
provide such clear early warning signals
of problems for the bankrupt health
systems.
Managerial Policy Implications
The type of solvency analysis presented
here leads to five important managerial
policy implications for the management
of financially strong and financially
weak health systems:
• Management should look beyond
the traditional measures generated
from the balance sheet and income
statement to include the cash flow
statement. This is an important step
for management teams, particularly
those for publicly traded companies,
as too much emphasis is placed on
earnings expectations (Rappaport
2006)—that is, the income
statement.
• Cash flow management effectiveness
should serve as a key performance in-
dicator of any financial solvency anal-
ysis program. This should include the
three operating cash flow indicators
(Ratios 1, 2, and 4) identified in this
study. This finding is consistent with
earlier studies by Price, Cameron,
and Price (2005) that identified seven
measures to be critical for assessing
the financial well-being of any health-
care organization, five of which are
cash-flow–based.
343
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• Do not classify financial solvency
analysis as a year-end activity. It
should occur at least quarterly and
optimally monthly so that necessary
adjustments and appropriate correc-
tive actions can be taken.
• Even financially strong and well-
established health systems should
calculate the seven financial solvency
ratios presented in this article using
their most current results. The recent
financial failures in the investment
banking business sectors clearly send
this message.
• If you begin calculating your organi-
zations’s financial solvency condition
after reading this article, then that
would achieve the desired outcome
from this research. The 13 bankrupt
health systems might have avoided
bankruptcy if they had taken early
detection and corrective actions.
In the data and related graphic
displays, two types of results are mean-
ingful. First, the strong contrast in the
patterns of the three operating-cash-
flow–related measures, namely Ratio
1: Operating Cash Flow Percentage
Change, from prior to current period;
Ratio 2: Operating Cash Flow to Net
Revenues; and Ratio 4: Cash Flow to
Total Liabilities, indicating sensitivity
in the hospital industry to cash flow
management. Second, the spikes and
dips before bankruptcy tell a story,
particularly in contrast to the relative
stability seen in the solvent facilities.
Hence, it is important to examine these
results for solvency indicators, not only
for differences in values between solvent
and bankrupt health systems but also
for trend lines that reflect control of
Jo u r n a l o f H ea lt hca re Ma n age me n t 53 :5 Se p t e mbe r / Octo be r 20 08
operations with the solvent health sys-
tems, in comparison to a lack of control
seen in the bankrupt health systems as
witnessed by the volatility in the trend
lines. As Griffith, Alexander, and Fos-
ter (2006) learned from their national
study of hospital performance, both
variance reduction and overall financial
improvement are important in assessing
financial results over time.
Study Limitations
When conducting any type of solvency
analysis, the limitations of such a study
must be recognized. As with any longi-
tudinal analysis, missing data from ear-
lier periods can pose a study limitation.
Such was the case here with some of the
earlier periods; yet there were adequate
data points to make for meaningful
interpretation of the results for the three
years before bankruptcy.
Further, recognize that the indus-
try average may not dictate the finan-
cial management polices of all health
systems. For example, with respect to
Ratio 3—Days of Cash on Hand—note
that two of the solvent health systems
(HCA and Universal) consistently report
single-digit values for this ratio, well be-
low the industry average of 31 days. This
may be because of the cash manage-
ment policies of solvent health systems,
whereby they maintain minimum cash
balances while investing most of their
cash in more attractive investment in-
struments and at the same time having
a line of credit they can exercise when
necessary (Coyne 1987).
Finally, the small sample size poses
a limitation in terms of the generaliz-
ability of these results. Indeed, this
study is ongoing and will continue to
344
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build the study sample for purposes of
more powerful future solvency analyses.
Future Studies
In summary, this solvency analysis can
contribute to the development of key
performance indicators specifically
directed toward the solvency analysis
of a hospital’s financial performance.
As with any solvency analysis, identify-
ing the early warning signs of financial
difficulties in the future is important.
Through such efforts, we can develop fi-
nancial models that both managers and
policymakers can use to prevent rather
than manage a financial disaster.
Note: More tables that show historical
data are available on www.ache.org/
pubs/jhmsub.cfm.
Acknowledgments
The authors wish to acknowledge the
bibliographical and editorial contribu-
tions of the WSU Health Policy and
Administration Department: Laura Man-
son, program assistant, for her extensive
editorial assistance; De Martin, academ-
ic coordinator, for her administrative
support; and graduate research assistants
Dan Simonson, Matthew Godfrey, K.C.
Nillson, Cole White, and Lisa Marcucci
for their work.
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PRACTITIONER APPLICATION

Gary J. Smith, PhD, FACHE, chief operating officer, St. Luke’s Rehabilitation Institute,
Spokane, Washington

F inancial solvency analysis is a critical area of importance for the practitioner in

today’s healthcare financial world. This article helps us take a step in the direction
of understanding the predictors of healthcare failures. This is not the end of the story,
but it takes us along an important path toward the goal of early detection of financial
hazards before they happen.
This article also moves us toward a better understanding of less frequently used
financial ratios or indicators. Its strength is the attention to cash liquidity measures
that appear to be quite powerful in predicting hospital failures. A weakness of this
article for me is the lack of data on not-for-profit failures, as I am more focused on
this sector of our industry; nevertheless, there is value in examining the investor-
owned sector using these measures.

345
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without the permission of Health Administration Press, Chicago, Illinois. For permission or reprint,
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 J o u r na l o f H ealth car e Man ag e men t 5 3: 5 Se p t em be r / Oc to ber 200 8

Another strength the authors have shown is how important the cash flow indica-
tors are in identifying early signs of financial difficulty. These measures and data can
be easily included in any financial monitoring system. Any organization should be
able to add key financial solvency indicators, if they are not already part of the exist-
ing monitoring system.
On the other hand, it would have been valuable to know about the association
between hospital size and solvency. Further, as a chief operating officer, I would like
to know more about day-to-day operational components, including such indicators
as employee per occupied bed, nursing hours per patient bed, and daily productivity
standards. Such measures provide a daily operational focus on activity rather than
“month end” financial results.
As indicated by the authors, these concepts are important to implement. They
have summarized the point well when they indicate: “Health system managers
should expand their horizons to include indicators of success and failure. Trends in
certain financial ratios are clearly distinct between solvent health systems and com-
parable bankrupt companies in the same industrial sector. This difference enables a
company to determine if it is on a solvent or insolvent track.”
This article is highly relevant to the current trends in the industry. As the authors
have summarized, “As with any solvency analysis, identifying the early warning signs
of financial difficulties in the future is important. Through such efforts, we can devel-
op financial models that both managers and policymakers can use to prevent rather
than manage a financial disaster.” Nobody could disagree with this direction and
effort of the current study in our industry today, considering the downward trends in
Medicare and Medicaid reimbursement. Research like this may help us understand
the battles practitioners face today and how to overcome them.

346
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without the permission of Health Administration Press, Chicago, Illinois. For permission or reprint,
please contact the Copyright Clearance Center at www.copyright.com.
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