Appendixes

Appendix 1.  Financial Indicators Considered for Use

Indicator Definition Included in Final Model
Accounts Payable Days Measures average number of days to pay accounts payable. X
Accounts Receivable Days Measures average number of days to collect receivables. X
Average Age of Facility Measures average age of capital assets by dividing accumulated depreciation by annual depreciation expense. X
Capital Assets to Long-term Debt Measures the value of fixed assets (buildings and property) compared to their costs.  
Cash Ratio Compares immediately available assets with current debts.  
Current Ratio Compares current assets with current liabilities to measure the ability to pay costs due within approximately 12 months with assets that can be converted into cash within 12 months. X
Debt ratio Compares total liabilities to total assets. X
Debt to Equity Ratio Compares total debt to total equity. X
Defensive Interval Compares the liquid assets to the expected cash outflows. X
Equity Financing Percentage of the provider's assets that are owned (no mortgage) by the provider. X
Gross Services Charge to Expenses Compares gross patient revenues (before adjustments and bad debts) to total expenses. X
Long-term Debt to Equity Ratio Compares long-term liabilities to total equity. X
Net Patient Revenue as a Percentage of Total Expenses Compares net patient revenues to total expenses. X
Operating Cash Flow to Total Debt Ratio Measures the percent of total debt that can be paid off using only cash flow from operating activities. X
Operating Margin Net income as a percentage of total income.  
Quick Ratio Compares immediately available assets and projected income (net accounts receivable) with current debt.  
Restricted Ratio Percentage of restricted funds compared to total funds.  
Return on Assets Compares net income with total assets. X
Return on Equity Compares net income or net change in equity to total equity. X
Total Asset Turnover Measures patient revenues compared to total assets.  
Uncollectible Accounts Receivable Ratio Measures percentage of gross receivables assumed to be uncollectible. X
Working Capital How much cash or cash equivalent is on hand to pay operating costs. X
Working Capital Turnover Measures services provided (or billed) compared to average working capital.  

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Appendix 2.  Final Weights and Scores1

Measure/Ratio Benchmark Possible Points
Liquidity Current Ratio
Compares current assets with current liabilities to measure the ability to pay costs due within approximately 12 months with assets that can be converted into cash within 12 months.		 2.14 15
Working Capital
How much cash or cash equivalent is on hand to pay operating costs.		 Greater Than $0 4
Defensive Interval
The defensive interval is the sum of liquid assets compared to the expected daily cash outflows.		 70.6 Days 5
Equity/Profitability Return On Equity
Compares net income or net change in equity to total equity.		 0.08 10
Debt To Equity Ratio
Compares total debt to total equity.		 0.54 5
Return On Assets
Compares net income with total assets.		 0.05 10
Long-term Debt To Equity Ratio
Compares Long-term liabilities to total equity.		 0.18 5
Coverage Operating Cash Flow To Total Debt
Measures the percent of total debt that can be paid off using only cash flow from operating activities.		 0.20 8
Debt Ratio
Compares total liabilities to total assets.		 0.33 5
Activity Accounts Payable Days
Measures average number of days to pay accounts payable.		 26.8 Days 10
Accounts Receivable Days
Measures average number of days to collect receivables.		 56.6 Days 10
Uncollectible Accounts Receivable Ratio
Measures percent of gross receivables assumed to be uncollectible.		 0.18 4
Other Average Age Of Facility
Measures average age of capital assets by dividing accumulated depreciation by annual depreciation expense.		 6.3 3
Net Patient Revenue As A Percentage of Total Expenses
Compares net patient revenues to total expenses.		 0.58 5
Gross Services Charge To Expenses
Compares gross patient revenues (before adjustments and bad debts) to total expenses.		 0.68 1

1 Key: 100 Points Total:  70-100 Low Risk; 60-69 Medium Risk; 50-59 Elevated Medium Risk; <=49 High Risk

Definitions:
Liquidity Ratios: Liquidity ratios measure whether a provider can meet obligations over the short run. 
Equity/Profitability Ratios: Equity and profitability measure the level of earnings in comparison to a base, such as assets, sales (patient services), or capital.
Coverage Ratios: Coverage ratios focus on the provider's level of debt and ability to pay.
Activity Ratios: Activity ratios measure activity levels of payables and receivables.
Other Ratios: Miscellaneous financial indicators.

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Appendix 3.  Sample Selection Method

As we did not know if any other factors in our data (such as location and number of patient visits) would have any bearing on financial viability, we did not stratify or cluster the sample. Instead, we used a simple random sample to select our outpatient safety net providers, by using the method shown below.

Assumptions for sample size determination are:

As we did not know the variance in the population or the sample, we assumed that the variance was roughly equal to the range divided by 4.1

Given the above, the desired sample size is:

The sample size (n) equals total population (N) times the variance (alpha) squared divided by ((N-1) Denominator (D) plus the variance squared), where Denominator (D) equals the desired error of the estimate (B) divided by 4, The variance is approximately equal to the range divided by 4, n is the sample size, N is the total population, and B is the desired error of the estimate.2 In this particular case:

The sample size (n) equals (153 multiplied by (3/4) squared) divided by ((152 multiplied by (0.25 squared/4)) plus (3/4) squared), or 29.3, which is rounded to 30.

[D] Select for Text Description.

Other assumptions for the range and standard error yield the following results:

Range Standard Error
0.05 0.1 0.15 0.2 0.25 0.3 0.35
2 111 61 35 22 15 11 8
3 131 92 61 42 30 22 17
4 140 111 83 61 46 35 28
5 145 124 99 78 61 48 39

1 Scheaffer RL, Mendenhall W, and Ott L. Elementary Survey Sampling. 4th edition. Boston (MA): PWS-KENT Publishing Company; 1990.

2 Ibid.

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Appendix 4.  Weighting Example

This example shows how to develop weights for scores.

The analysts want to weigh seven measures: Cash on Hand, Debt-to-Equity Ratio, Facility Age, Cost per Encounter, Return on Assets, Revenue Growth, and Uncollectible Accounts Receivable Ratio.

The analysts rank the measures from most to least important and assign initial scores:

Measure Initial Weight
Revenue Growth 7
Debt-to-Equity Ratio 6
Return on Assets 5
Uncollectible Accounts Receivable Ratio 4
Cash on Hand 3
Cost per Encounter 2
Facility Age 1

After reviewing and discussing the rankings, the analysts decide that:

The revised weights are:

Measure Initial Weight Revised Weight
Revenue Growth 7 10
Debt-to-Equity Ratio 6 6
Return on Assets 5 5
Uncollectible Accounts Receivable Ratio 4 3
Cash on Hand 3 3
Cost per Encounter 2 1
Facility Age 1 1

Next, the analysts convert the revised scores to a 0 to 100 point scale by computing the proportion of each revised weight that makes up the total of the revised weights and multiplying by 100:

Measure Initial Weight Revised Weight Proportion of Total Points
Revenue Growth 7 10 0.344828 34.48
Debt-to-Equity Ratio 6 6 0.206897 20.69
Return on Assets 5 5 0.172414 17.24
Uncollectible Accounts Receivable Ratio 4 3 0.103448 10.34
Cash on Hand 3 3 0.103448 10.34
Cost per Encounter 2 1 0.034483 3.45
Facility Age 1 1 0.034483 3.45
Totals   29 1.000001 100.00

The final column shows the points a provider gets if it meets the benchmark.

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