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Healthcare Finance – Operating Budget

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Executive Summary

HCA Healthcare is currently the best-performing healthcare organization in the US.

The US economy, like in any other part of the world, has been devastated by the ongoing

pandemic as the demand for many different goods and services fell substantially in the past

two years due to the effects of the pandemic. The company managed to record a total of

$58.752 billion in revenue, which was a 14.01% increase from that of the 2020 financial year.

HCA Healthcare's net income for the 2021 financial year was $6.956 billion, a significant

increase from the $.754 billion that the company managed in the previous fiscal year. Even

though the company had over $50 billion in total assets, the company could only manage

$58.752 billion in revenue, which is an undeniably low asset turnover ratio. HCA

Healthcare's shareholders' equity reduced substantially from $7.819 billion in 2020 to just

$1.489 after repurchasing common stock valued at $8.215 billion, paying a total of $628

million in dividends, and distributing $749 million. Also, HCA Healthcare may be earning

commendable profits, but the company's financial capacity to meet its liabilities and other

financial obligations is limited to shareholders' equity since the company's assets and capital

are inadequate against long-term and short-term obligations. HCA Healthcare, just like other

healthcare firms, could resort to other cashflow measures, such as increasing pay rates or

charges, to strengthen its financial capability. The company has various revenue streams, all

of which are likely to increase their contributions to the net annual revenue to over $60

billion in the next financial year as the demand increases and the economy recovers. The

projections also assume that no significant changes will occur regarding HCA Healthcare's

expenses thus, the company's revenue could reach more than $18 billion in the 2022 fiscal

year.
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Healthcare Finance – Operating Budget

Introduction

A budget is an important financial tool for management and operations not just in

healthcare but in other sectors as well. Budgeting in healthcare ensures that the available

funds are allocated to the priority services that could enable the organization to source and

provide health services effectively and efficiently (King et al., 2010). The healthcare industry

is rapidly changing, especially during this ongoing Covid-19 pandemic, as new patients

emerge, technologies are updated, and reimbursement approaches change thus, hospitals must

continuously adapt and anticipate and plan for operational needs. King et al. (2010) note that

a strong budgeting process and its outcomes enable the organization to not only anticipate

emerging dynamics in operations but also establish priorities with which to achieve desired

objectives. In this regard, a healthcare budget is one of the most important tools with which

HCA Healthcare, the organization of focus for this paper, can understand the most productive

areas to allocate capital to be more efficient and effective in delivering services to consumers.

This paper reviews HCA Healthcare's financial and operational performance, consider

relevant assumptions associated with the company and its industry indicators, and detail an

operating budget for the 2022 financial year.

The Organization and Industry

HCA Healthcare Inc.

HCA Healthcare is one of the largest and best-performing healthcare organizations in

the United States (US). It is a for-profit firm that provides a vast range of health care services

in a multitude of specialties, including internal medicine, general surgery, neurosurgery,

oncology, obstetrics, and orthopedics (HCA Healthcare, 2021). As of December 2021, HCA

Healthcare operated over 180 hospitals, which comprised 175 general care hospitals, 2
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rehabilitation hospitals, and five psychiatric facilities (HCA Healthcare, 2021). Additionally,

the incorporation also operates 125 freestanding surgery centers, among many other units

(HCA Healthcare, 2021). With the primary objective to provide the US population with a

comprehensive hub of quality healthcare services, HCA Healthcare’s facilities are some of

the most preferred by the public.

The US Healthcare Industry

The US healthcare industry has changed significantly over the past few years. While

investigating the dynamics and competition in the industry, Carroll (2021) established that

some of the most notable changes began after the passage of the Affordable Care Act back in

the year 2010, and have mainly focused on ways with which the country can improve the

quality of healthcare services and reduce the associated costs. The result of these changes has

been partly dominated by the precipitation of a wave of the healthcare system and hospital

consolidation. However, Dafny and Lee (2016) observed that the US healthcare industry is

yet to be fully efficient, reliable, and affordable. It is not because the system lacks proposed

solutions and resources to meet these demanding needs, but the industry lacks the level of

competition that would result in improved quality of services, the efficiency of practices, and

innovations to drive cost (Dafny & Lee, 2016). Nonetheless, the industry continues to evolve

and HCA Healthcare is subject to stiff competition from other well-established healthcare

organizations such as Massachusetts General Hospital, Texas Health Resources, DaVita, and

Baylor Scott & White Health, just to list a few. Inferentially, HCA Healthcare’s budgeting

processes and activities must consider insights into the dynamics of the industry for the best

outcomes.

Assumptions
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The current budgeting exercise makes various assumptions with which HCA

Healthcare can account for trends in the industry, as well as the internal environment.

Assumptions are key aspects of any budgeting process, and must be integrated carefully to

align financial intentions and realities. As hinted in the introductory section, the budgeting

process is largely about using past financial data to inform assumptions about the future, but

with a sole quest of meeting organizational financial and operational goals. The following are

some of the key assumptions on which the current budget has been based, as well as their

underlying factors.

The budget assumes an increase in charges for outpatient and inpatient services in the

following financial year. From the Annual Report for the financial year 2021, HCA

Healthcare's combined outpatient and inpatient prices are arguably at the 40th percentile, and

could improve as Covid-19-related risks begin to fade, the economy recovers, and the health

industry begins to realize value for increased healthcare service consumptions. The

assumption also reflects the company's plan to account for the financial impact of the

ongoing Covid-19 and indebtedness in the baseline financial year. According to HCA

Healthcare (2021), the government has been supporting healthcare providers to manage their

financial conditions and respond effectively to Covid-19, but the future may need HCA

Healthcare, just like other healthcare firms, to resort to other cashflow measures to strengthen

its financial capability thus, increasing charges for services.

HCA Healthcare’s revenue has been increasing steadily over the past three years, and

it could increase in the coming financial year by 20%. The company has various revenue

streams, all of which have been steadily increasing their contributions to the net annual

revenue. Managed care and other insurers have always been the main source of HCA

Healthcare’s revenue, contributing 51.6%, to the last year’s annual revenue. Managed

Medicare, Medicare, Medicaid, Managed Medicaid, and Internal managed care and other
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insurers are some of the other sources of revenue that could increase their contribution as the

economy continue to recover. HCA Healthcare provided a guidance range of $60 to $62

billion in revenue for the 2022 financial year. The guidance reflects assumptions such as the

company’s current expectations regarding the impact that Covid-19, which is not subject to

the potential impact of losses on retirements of debts, losses associated with sales of facilities,

impairments of some fixed assets, and costs that are related to legal claims (HCA Healthcare,

2022).

Financial and Operational Analysis

Revenue

HCA Healthcare's revenue has been increasing significantly in the past three years,

despite the devastation to which the ongoing economic conditions have subjected

organizations. The incorporation of hospitals' revenue depends upon the inpatient level of

occupancy, the volume of outpatient procedures, ancillary and medical services ordered by

physicians and received patients, and charges/rates for the services (HCA Healthcare, 2021).

It is imperative to note that the geographical location, third-party payers, and the type of

services provided are key determinants of the rates of reimbursement for outpatients and

inpatients, and the notion applies to HCA Healthcare operations. HCA Healthcare has a total

of seven categories of revenue sources, detailed in Figure 1, that contribute to the company’s

net annual revenue. Medicare and Managed Medicare collectively contributed 14.3% of the

company’s 2021 annual revenue. Medicaid and Managed Medicaid provided the company

with 9.2%, Managed care and other insurers with 51.6%, and other local sources contributed

$2.836 billion, 4.8% of the total annual revenue (HCA Healthcare, 2021). Moreover, HCA

Healthcare also sources its revenue from international managed care and insurers, which

contributed 2.3% of its 2021 annual revenue. The company managed to record a total of
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$58.752 billion in revenue, which was a 14.01% increase from that of the 2020 financial year.

Therefore, with the projected increase in demand and consumption of healthcare services,

managing a range between $60 to $62 billion in revenue is achievable.

Figure 1: HCA Healthcare sources of revenue (HCA Healthcare, 2021).

Profitability

A company’s profitability trends provide insights into its financial health and

performance, and HCA Healthcare is arguably healthy and performs well. For a for-profit

organization, profit describes the net income that the company generates from the sale of

services and products (Ramezani et al., 2001). Ramezani et al. (2001) explain that the net

income of a business company describes the amount that the firm is left with upon deducting

all costs, payable interests, taxes on income, asset depreciation, and other related expenses

and costs. Therefore, the profitability of an organization is a measure of whether the company

is creating value for shareholders. This is one of the financial areas in which HCA Healthcare

has been performing commendably well over the past few years, including 2020 and 2021

when the ongoing Covid-19 pandemic resulted in substantial losses across many industries,

not just in the US but also worldwide. As detailed in the company’s income statement, HCA

Healthcare’s net income for the 2021 financial year was $6.956 billion, a significant increase
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from the $.754 billion that the company managed in the previous fiscal year. The company's

business activities are profitable, and even its net profit margin for the previous two years

reveals this trend. A net profit margin compares the profit that a company earns to the total

revenue that it generates from its business activities. With a net annual profit margin of 11.84,

as compared to 7.284 in the previous fiscal year, HCA Healthcare has a high profitability

ratio for the revenue it generates, and the profitability was even higher in the 2021 financial

year.

Table 1:Revenue, net income, and a net profit margin between 2020 and 2021

2021 2020
Revenue $58.75 billion $51.53 billion
Net Income $6.956 billion $3.754 billion
Net profit margin 11.84 7.28

Operational Efficiency

The efficiency of operations is another measure of the financial and operational

performance of a business organization. Johnson and Lee (2013) explain that operational

efficiency measures the organization's profit as a function of the operating costs associated

with its business activities. In this regard, operational efficiency indicators reveal the ease

with which a business company generates profits by deploying and utilizing the available

capital and assets. A firm that has high financial excellence tends to have high efficiency in

using its assets and capital to generate revenue and income. For HCA Healthcare, the

company has been generating increasing income over the past few years but with arguably

low efficiency. Even though HCA Healthcare had over $50 billion in total assets, the

company could only manage $58.752 billion in revenue, which is a low asset turnover ratio

of just 1.16 in 2021. The efficiency was even lower in 2020, 1.09, despite having $47.49 in

total assets during that fiscal year. This low operational efficiency is also evident in the
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company's receivables. Amanda (2019) argues that receivable turnover is an operational

efficiency indicator that measures whether an organization is efficient in collecting its

receivable accounts or converting the credits that it has extended to its customers into

income. Even though HCA Healthcare’s efficiency in converting its credits into income is a

little higher than that of leveraging its assets to generate revenue, the company’s operational

efficiency in this aspect reduced slightly from 7.31 in 2020 to 7.26 in 2021. Therefore, HCA

Healthcare is generating profits but with difficulty, perhaps because of the current economic

situation that has devastated nearly all business organizations.

Table 2: Operational efficiency indicators for HCA Healthcare

2021 2020
Asset turnover ratio 1.16 1.09
Receivable turnover ratio 7.26 7.31

Capital Efficiency

Every business organization must be able to meet its cost obligations, and so should

HCA Healthcare. Capital efficiency is a measure of the expenses that a company incurs to

generate its income. Kasiran et al. (2016) describe it as the relationship between the amount

that a company must spend to generate its services or products and the revenue it generates

from the sales. HCA Healthcare, for example, is a healthcare organization that deals mostly

with medical services thus, its capital efficiency would represent the relationship between the

cost of generating the services and the revenue it generates after selling the services to

patients. To be productive and create income for its stakeholders, HCA Healthcare must be

generating revenues that are more than its expenses. If the company must spend a dollar to

make medical services available to patients, then, to be capitally efficient, selling the services

to the patients must generate enough income to pay for the one-dollar cost, and also pay

owners' interests on their equity and investments (Sivasankaran et al., 2019). HCA
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Healthcare’s shareholders’ equity reduced substantially from $7.819 billion in 2020 to just

$1.489, but its return on equity ratio (ROE) increased from 151.69 to 518.54 between the two

fiscal years. According to HCA Healthcare’s financial statements for the two years, the

company repurchased common stock valued at $8.215 billion, paid a total of $628 million in

dividends, and distributed $749 million thus, explaining the huge reduction in shareholders’

equity. Despite the reduction in equity, the company’s ROE trends indicate high efficiency in

generating revenue from equity. This remarkable capital efficiency is also evident in the

company's return on assets and returns on investments ratios as shown in the following table.

Table 3: HCA Healthcare capital efficiency indicators

2021 2020
ROE 518.53 151.69
ROA 15.21 9.23
ROI 21.55 13.02

Liquidity and Solvency

Apart from generating income efficiently using resources such as assets and capital, a

business organization must also be able to meet its long-term and short-term financial

obligations. Solvency indicators measure the ability of the organization to meet its long-term

debt obligations by evaluating the company's cash flow against long-term debts (Kasiran et

al., 2016). Conversely, solvency ratios are indicators with which to assess and evaluate the

company’s ability to meet its short-term debt obligations (Kasiran et al., 2016). On this note,

HCA Healthcare must be able to pay back not just its short-term debts but long-term

obligations as well. Khidmat and Rehman (2014) argue that better liquidity and solvency

indicators are important for organizational opportunities, especially when the company is

seeking additional assets or financial support from potential investors or creditors. HCA

Healthcare can meet its short-term financial obligations, but the capacity is relatively weak.
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For example, the company’s current ratio, which is a measure of just how effectively the firm

can meet its current liabilities using current assets, averaged below 1.5 between 2020 and

2021. Similarly, the company’s long-term debt/capital ratio has also been below 1.0,

averaging 0.94, in the past two financial years, which indicates that HCA Healthcare’s long-

term debts are more than the available capital. However, the company’s total equity is enough

to pay for the firm’s total debts; the debt/equity ratio increased from 10.72 in 2020 to 23.22 in

2021. Therefore, even though HCA Healthcare is earning profits, the company's financial

capacity to meet its liabilities and other financial obligations is limited to shareholders' equity

since the company's assets and capital are inadequate against long-term and short-term

obligations.

Benchmarks and Comparative Analysis

Even though HCA Healthcare’s financial performance is not its best, the company,

however, is performing financially and operationally better than some of its competitors.

HCA Healthcare generates more profit than DaVita, one of its close rivals, and the efficiency

of converting its assets, equity, and investments into revenue and income is also

comparatively better. For example, in the 2021 financial year, HCA Healthcare's profit

margin was 11.8% better than that of DaVita at 8.4%. The same better performance was

evident in their ROE and ROA ratios. While HCA Healthcare could convert its equity into

income over 518 times more, which represents more than 317%, DaVita only managed just

78.2% of its equity. However, DaVita Inc. is better than HCA Healthcare when it comes to

meeting its short-term and long-term financial obligations. While HCA Healthcare’s total

current assets are 1.41 times more than its current liabilities, most other healthcare

organizations in the industry are averaging 1.97. Similarly, DaVita's ability to pay its debts

using its equity is better, at 15.76, as compared to that of HCA Healthcare at 33.08, implying

that the company’s financial structure has relatively more debts than equity. Moreover, HCA
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Healthcare ranks better financially as compared to its competitors. The company’s revenue of

$58.752 billion places it ahead of all its competitors, which are nearly 90 in total. Tenet

Healthcare Corporation, which is second in the industry, managed a total of $19.485 billion

in revenue and $27.579 in total assets, and DaVita in 6th place with $11.619 billion in revenue

and $17.121 billion in assets.

Operational Budget

Proposed HCA Healthcare Inc. Consolidated Budget for 2022 Fiscal Year
2021 (in $million) 2022 (in $million)
Revenue
Medicare 10,447 12,437
Managed Medicare 8,424 9,325
Medicaid 2,290 4,300
Managed Medicaid 3,124 3,425
Managed care and other insurers 30,295 32,250
International (managed care and 1,336 2,366
other insurers)
Other 2,836 3,837

Total revenue 58,752 67,940

Expenses
Salaries and benefits 26,779 26,779
Supplies expenses 9,481 10,481
Other operating expenses 9,961 9,961
Equity in earnings (113) (113)
Depreciation and amortization 2,853 2,853
Expenses on interest 1,566 1,566
Losses (gains) on sales (1,620) (1,620)
Losses on debt retirements 12 12
Total expenses 48,919 49,919

Operating Income 9,833 18,021

Conclusion

HCA Healthcare is currently the best-performing healthcare organization in the US.

The US economy, like in any other part of the world, has been devastated by the ongoing

pandemic as the demand for many different goods and services fell substantially in the past
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two years owing to the impact of the pandemic. However, the healthcare industry, through

stretched to nearly its maximum capacity, witnessed increased demand for medical services

and products, resulting in increased sales in the past two financial years. HCA Healthcare's

revenue, net income, and equity have increased significantly in the past recent years, and the

same trend could continue into the next fiscal year now that the economy is beginning to

recover. However, HCA Healthcare must make efforts to address its operational and capital

efficiency since the company is generating profits but at a high cost in terms of assets and

capital. Moreover, projections predict huge profits in the next financial year, but HCA

Healthcare must address its capacity to meet both short-term and long-term financial

obligations since it is currently low as compared to some of its main competitors such as

DaVita Inc.
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