Case 3, Charitable Contributions and Debt

Write a 1,050- to 1,400-word response in which you address the following questions from Case 3, Charitable Contributions and Debt:A Comparison of St. Jude Children’s Research Hospital/ALSAC andUniversal Health Services:Questions from Requirement AQuestions from Requirement BHow would your answers to Requirements A and B differ if thegovernment owned and operated the hospital? CASE 3: Charitable Contributions and Debt: AComparison of St. Jude Children’s ResearchHospital/ALSAC and Universal HealthServicesCASE TOPICS OUTLINE1. St. Jude Children’s Research Hospital/ALSAC o A. Primary Objective o B. Sources of Capital o C. Reporting Practices2. Universal Health Services o A. Investor-Owned Hospital o B. Debt Including Leases 3. Comparison Hospitals are an industry in which both not-for-profits and investor-ownedfacilities operate. The sources of capital available to the not-for-profitsinclude charitable contributions and debt offerings—unless they aregovernmental, in which case, higher taxes are also an alternative. Debtavailability is always, in part, a function of performance, and just as failureshave arisen in both sectors, about one-third of the investor-owned hospitalshave been described as losing money. Of interest is how can one effectivelyevaluate such an industry, with this type of diversity in organizational formsand capital availability? A necessary prerequisite to such an evaluation is tohave a firm understanding of how charitable contributions are presented.St. Jude Children’s Research Hospital/ALSAC has the mission of findingcures for children with catastrophic diseases through research andtreatment. For the fiscal year 1999, this entity reported total assets of$221,664,232 and income of $177,071,890. A Web siteat http://www.stjude.org, as well as Guidestar’s listing, references a Form990 (Return of Organization Exempt from Income Tax) filing, availability ofaudited financial statements upon request, and information that the hospitalhas 2,100 employees and 350 volunteers. Founded in 1962, the organizationseeks funds from contributions and grants for unrestricted operatingexpenses, specific projects, buildings, and endowments. More than 4,000patients are seen annually, with a hospital maintaining 56 beds. The Form990, Part III states that the hospital provided 15,231 inpatient days of careduring the fiscal year and patients made 40,982 clinic visits. ALSAC is theAmerican Lebanese Syrian Associated Charities, Inc., the fund-raising armof St. Jude Children’s Research Hospital. It reported 1999 total assets of$1,007,699,320 and income of $274,123,399. This organization reports thenumber of employees as 565 and the number of volunteers as 800,000. Withits sole focus on the hospital, ALSAC’s self-description explains that no childhas ever been turned away due to an inability to pay for treatment andexplains key accomplishments in the research area achieved by St. Jude’sresearch and treatment of children with catastrophic diseases. What isborne out by the example of St. Jude is the fact that a review of the Form990 filed for the fiscal year ending 6/30/99 indicates in Part VI the names ofrelated organizations: ALSAC and St. Jude Hospital Foundation, both ofwhich are tax exempt. To gain a sense of capital availability to a not-forprofit entity, affiliated entities must be considered. In addition, the role ofvolunteers is a source of human capital not effectively captured within theframework of financial statements for not-for-profits, as reflected in theForm 990 for the fiscal year ending 6/30/99 for ALSAC, which states in PartVI: Unpaid volunteers have made significant contributions of their time,principally in fund-raising activities. The value of these services is notrecognized in the financial statements since it is not susceptible to anobjective measurement or valuation and because the activities of thesevolunteers are not subject to the operating supervision and control presentin an employer/employee relationship.Hence, as one evaluates capital sources and uses by not-for-profits, care isneeded to consider affiliated organizations’ role, total contributions, and theeffect of volunteerism on the comparability between not-for-profit andinvestor-owned operations.Universal Health Services, Inc. filed its 10-K on March 28, 2001, for thecalendar year 2000, which includes comparative information for 1999.Analysts have described the company as the most aggressive company inthe industry over the 1999–2001 time frame in making acquisitions,particularly of not-for-profit operations and investor-owned operationsexperiencing losses. The company is praised for it high operating leverage,the relatively small number of shareholders relative to the magnitude oftotal revenue, and stock price as a multiple of earnings. The companyoperates 59 hospitals and, as of 1999, had an average number of licensedbeds of 4,806 at acute care hospitals and 1,976 at behavioral health centers,with patient days of 963,842 and 444,632, respectively. Of interest is acommentary on the competition found in the company’s filing:CompetitionIn all geographical areas in which the Company operates, there are otherhospitals which provide services comparable to those offered by theCompany’s hospitals, some of which are owned by governmental agenciesand supported by tax revenues, and others of which are owned by nonprofitcorporations and may be supported to a large extent by endowments andcharitable contributions. Such support is not available to the Company’shospitals. Certain of the Company’s competitors have greater financialresources, are better equipped and offer a broader range of services thanthe Company. Outpatient treatment and diagnostic facilities, outpatientsurgical centers and freestanding ambulatory surgical centers also impactthe healthcare marketplace. In recent years, competition among healthcareproviders for patients has intensified as hospital occupancy rates in theUnited States have declined due to, among other things, regulatory andtechnological changes, increasing use of managed care payment systems,cost containment pressures, a shift toward outpatient treatment and anincreasing supply of physicians. The Company’s strategies are designed,and management believes that its facilities are positioned, to be competitiveunder these changing circumstances. (Source: 10-K filed 3/28/2001) Financial information is provided in Tables 5.3-1 and 5.3-2 for both thenot-for-profit and the investor-owned hospitals. Fiscal Year Ended 1999 Contributions, gifts, grants and similar amountsreceived: Direct public support St. Jude Children’sAmerican Lebanese SyrianResearch Hospital Form Associated Charities, Inc. (ALSAC)990*Form 990* $91,978,426 Indirect public support 2,906,934 Government contributions (grants) 31,469,447 Program service revenue, including governmentfees and contracts (i.e., health insurance revenue) 46,034,710 Accounts receivable 24,217,029 Pledges receivableAllowance for doubtful accounts Program service expenses: Education andtrainingProgram service expenses: Medical ServicesReconciliation of revenue, gains, and other 4,230,76423,604,748 9,363,328 Program service expensesProgram service expenses: Research $231,793,748 99,282,90687,225,830 5,471,186 93,735,602?4,023,815 65,891,269 Fiscal Year Ended 1999 St. Jude Children’sAmerican Lebanese SyrianResearch Hospital Form Associated Charities, Inc. (ALSAC)990*Form 990* support to audited numbers: net unrealized gainson investmentsDeferred grant revenue 1,857,628 (Statement 5) Support from American Lebanese SyrianAssociated Charities, Inc. 91,978,426 (Statement 7) 91,978,426 (paid per Statements 4, 6) Excluded contributions 2,746,295 (Statement 1) Excess or (deficit) for the year ?10,933,191 120,521,982 Net assets or fund balances at end of year 199,707,440 994,501,910 Temporarily restricted 15,715,890 Permanently restricted 14,000,000 247,147,826 Total liabilities 21,956,792 7,017,192 Schedule of deferred debits & credits by contract(FAS 116 adjustment noted to result in thisdeferred revenue) 157,628 Table 5.3-1: Financial Comparisons of theNot-for
-Profit Entities* The GuideStar.org Web site (http://www.guidestar.org) provides accessto Forms 990 in .PDF format. Table 5.3-2: Universal Health Services, Inc.’sFinancial Excerpts*Income Statements (in thousands) Reported 1999 Calendar Year Net revenues $2,042,380 Operating charges 1,913,346 Components:Salaries, wages, and benefits 793,529 Provision for doubtful accounts 166,139 Lease and rental expense 49,029 Interest expense, net 26,872 Net income 77,775 Total assets 1,497,973 Total liabilities 856,362 Total retained earnings 482,960 Capital stock 306 Income Statements (in thousands) Reported 1999 Calendar Year Paid-in capital in excess of par 158,345 * The 10-K filing as of 3/28/2001 at EDGAR(http://www.sec.gov/edgar.shtml) provides financial statementinformation for 2000 and 1999. Requirement A: Recording Revenue 1. What is meant by the reference in Table 5.3-1 to an FAS 116adjustment? 2. How are contributions recorded? Is there a distinction betweenpledges receivable and accounts receivable? 3. Are there circumstances when financial statements can quantifyvolunteers’ services? 4. Can financial statement users of not-for-profit hospitals’ financialstatements expect to be fully informed regarding affiliated parties, suchas the linkages between St. Jude Children’s Research Hospital, ALSAC,and the foundation cited? Explain. Requirement B: Revenue Mix (StrategyRelated Considerations)The 10-K filing of Universal Health Services, Inc. describes the mix ofrevenue sources, as depicted in Table 5.3-3. Table 5.3-3: Patient Revenue Mix PERCENTAGE OF NET PATIENT REVENUES2000 1999 1998 1997 1996 Medicare 32.3% 33.5% 34.3% 35.6% 35.6% Medicaid 11.5% 12.6% 11.3% 14.5% 15.3% Managed Care (HMOs and PPOs) 34.5% 31.5% 27.2% 19.1% N/A Other Sources 21.7% 22.4% 27.2% 30.8% 49.1% Total 100% 100% 100% 100% 100% Third Party Payors N/A-Not available (Source: 10-K filed 3/28/2001) 1. How does this revenue mix compare with the revenue blend of thenot-for-profit entity, St. Jude Children’s Research Hospital (ALSAC)?Access the latest SEC filing and compare the reported revenue mix; has itchanged? 2. What does that imply as to the strategies of investor-ownedhospitals in managing risk and ensuring adequate capital relative to notfor-profit entities? An opportunity exists to explore the greater social andpolitical questions that are frequently debated about the compatibility ofprofit-oriented entities and quality of health care, relative to not-for-profitentities. As background, identify what the latest SEC filings reportconcerning charity care. Directed Self-StudyAccess the 10-Q (from sec.gov) for the quarterly period ended June 30,2006 and explain how Hurricane Katrina affected Universal Health Services. The same 10-Q reports on a funding commitment the company hasmade to the alma mater of the Chairman of the Board of Directors and ChiefExecutive Officer. Describe the disclosure and explain why the event is an“Other Related Party Transaction.” [Download the 10-Q in text format andapply the Find capability in your word processor. Also access FARS andidentify the guidance relevant to each event.] Health Insurance, Public Policy, andBackdatingA key factor in the health care industry is health insurance. Public policyhas debated universal health care, changes to governmental programs suchas Medicare, adjustment of tax policy regarding employers’ and employees’deduction for premiums, and alternative approaches to this sector of theeconomy. State and local governments, under a new accounting rule, haverecently estimated their total retiree health bill to be about $1.1 trillion.Over the past decade, some governmental units used pension funds to helppay for double-digit growth in health care for retired public workers.Explain how accounting interacts with public policy. Use FARS as aresource, according particular attention to FAS 158.Health insurer UnitedHealth has been the focus of media coverageinvolving what is known as the “options backdating scandal”.UnitedHealth’s internal probe estimates its past decade exposure at half abillion dollars (“UnitedHealth Faces Formal Probe,” Wall Street Journal,December 27, 2006, p. B8). Is there a relationship between the magnitudeof the restatement and the nature of the health care sector of the economy?Explain. The SEC’s Division of Corporation Finance shared a “Sample LetterSent in Response to Inquiries Related to Filing Restated FinancialStatements for Errors in Accounting for Stock Option Grants” dated January2007