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 and
Universal Health Services:
Questions from Requirement A
Questions from Requirement B
How would your answers to Requirements A and B differ if the
government owned and operated the hospital? CASE 3: Charitable Contributions and Debt: A
Comparison of St. Jude Children’s Research
Hospital/ALSAC and Universal Health

Services
CASE TOPICS OUTLINE
1. St. Jude Children’s Research Hospital/ALSAC o A. Primary Objective o B. Sources of Capital o C. Reporting Practices
2. 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-owned
facilities operate. The sources of capital available to the not-for-profits
include charitable contributions and debt offerings—unless they are
governmental, in which case, higher taxes are also an alternative. Debt
availability is always, in part, a function of performance, and just as failures
have arisen in both sectors, about one-third of the investor-owned hospitals
have been described as losing money. Of interest is how can one effectively
evaluate such an industry, with this type of diversity in organizational forms
and capital availability? A necessary prerequisite to such an evaluation is to
have a firm understanding of how charitable contributions are presented.
St. Jude Children’s Research Hospital/ALSAC has the mission of finding
cures for children with catastrophic diseases through research and
treatment. For the fiscal year 1999, this entity reported total assets of
$221,664,232 and income of $177,071,890. A Web site
at http://www.stjude.org, as well as Guidestar’s listing, references a Form
990 (Return of Organization Exempt from Income Tax) filing, availability of
audited financial statements upon request, and information that the hospital
has 2,100 employees and 350 volunteers. Founded in 1962, the organization
seeks funds from contributions and grants for unrestricted operating
expenses, specific projects, buildings, and endowments. More than 4,000
patients are seen annually, with a hospital maintaining 56 beds. The Form
990, Part III states that the hospital provided 15,231 inpatient days of care
during the fiscal year and patients made 40,982 clinic visits. ALSAC is the
American Lebanese Syrian Associated Charities, Inc., the fund-raising arm
of 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 the
number of employees as 565 and the number of volunteers as 800,000. With
its sole focus on the hospital, ALSAC’s self-description explains that no child
has ever been turned away due to an inability to pay for treatment and
explains key accomplishments in the research area achieved by St. Jude’s
research and treatment of children with catastrophic diseases. What is
borne out by the example of St. Jude is the fact that a review of the Form
990 filed for the fiscal year ending 6/30/99 indicates in Part VI the names of
related organizations: ALSAC and St. Jude Hospital Foundation, both of
which are tax exempt. To gain a sense of capital availability to a not-forprofit entity, affiliated entities must be considered. In addition, the role of
volunteers is a source of human capital not effectively captured within the
framework of financial statements for not-for-profits, as reflected in the
Form 990 for the fiscal year ending 6/30/99 for ALSAC, which states in Part
VI: Unpaid volunteers have made significant contributions of their time,
principally in fund-raising activities. The value of these services is not
recognized in the financial statements since it is not susceptible to an
objective measurement or valuation and because the activities of these
volunteers are not subject to the operating supervision and control present
in an employer/employee relationship.
Hence, as one evaluates capital sources and uses by not-for-profits, care is
needed to consider affiliated organizations’ role, total contributions, and the
effect of volunteerism on the comparability between not-for-profit and
investor-owned operations.
Universal Health Services, Inc. filed its 10-K on March 28, 2001, for the
calendar year 2000, which includes comparative information for 1999.
Analysts have described the company as the most aggressive company in
the industry over the 1999–2001 time frame in making acquisitions,
particularly of not-for-profit operations and investor-owned operations
experiencing losses. The company is praised for it high operating leverage,
the relatively small number of shareholders relative to the magnitude of
total revenue, and stock price as a multiple of earnings. The company
operates 59 hospitals and, as of 1999, had an average number of licensed
beds 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 a
commentary on the competition found in the company’s filing:
Competition
In all geographical areas in which the Company operates, there are other
hospitals which provide services comparable to those offered by the
Company’s hospitals, some of which are owned by governmental agencies
and supported by tax revenues, and others of which are owned by nonprofit
corporations and may be supported to a large extent by endowments and
charitable contributions. Such support is not available to the Company’s
hospitals. Certain of the Company’s competitors have greater financial
resources, are better equipped and offer a broader range of services than
the Company. Outpatient treatment and diagnostic facilities, outpatient
surgical centers and freestanding ambulatory surgical centers also impact
the healthcare marketplace. In recent years, competition among healthcare
providers for patients has intensified as hospital occupancy rates in the
United States have declined due to, among other things, regulatory and
technological changes, increasing use of managed care payment systems,
cost containment pressures, a shift toward outpatient treatment and an
increasing supply of physicians. The Company’s strategies are designed,
and management believes that its facilities are positioned, to be competitive
under 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 the
not-for-profit and the investor-owned hospitals. Fiscal Year Ended 1999 Contributions, gifts, grants and similar amounts
received: Direct public support St. Jude Children’s
American Lebanese Syrian
Research 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 government
fees and contracts (i.e., health insurance revenue) 46,034,710 Accounts receivable 24,217,029 Pledges receivable
Allowance for doubtful accounts Program service expenses: Education and
training
Program service expenses: Medical Services
Reconciliation of revenue, gains, and other 4,230,764
23,604,748 9,363,328 Program service expenses
Program service expenses: Research $231,793,748 99,282,906
87,225,830 5,471,186 93,735,602
?4,023,815 65,891,269 Fiscal Year Ended 1999 St. Jude Children’s
American Lebanese Syrian
Research Hospital Form Associated Charities, Inc. (ALSAC)
990*
Form 990* support to audited numbers: net unrealized gains
on investments
Deferred grant revenue 1,857,628 (Statement 5) Support from American Lebanese Syrian
Associated 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 this
deferred revenue) 157,628 Table 5.3-1: Financial Comparisons of the
Not-for-Profit Entities
* The GuideStar.org Web site (http://www.guidestar.org) provides access
to Forms 990 in .PDF format. Table 5.3-2: Universal Health Services, Inc.’s
Financial 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 statement
information for 2000 and 1999. Requirement A: Recording Revenue 1. What is meant by the reference in Table 5.3-1 to an FAS 116
adjustment? 2. How are contributions recorded? Is there a distinction between
pledges receivable and accounts receivable? 3. Are there circumstances when financial statements can quantify
volunteers’ services? 4. Can financial statement users of not-for-profit hospitals’ financial
statements expect to be fully informed regarding affiliated parties, such
as 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 of
revenue sources, as depicted in Table 5.3-3. Table 5.3-3: Patient Revenue Mix PERCENTAGE OF NET PATIENT REVENUES
2000 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 the
not-for-profit entity, St. Jude Children’s Research Hospital (ALSAC)?
Access the latest SEC filing and compare the reported revenue mix; has it
changed? 2. What does that imply as to the strategies of investor-owned
hospitals in managing risk and ensuring adequate capital relative to notfor-profit entities? An opportunity exists to explore the greater social and
political questions that are frequently debated about the compatibility of
profit-oriented entities and quality of health care, relative to not-for-profit
entities. As background, identify what the latest SEC filings report
concerning charity care. Directed Self-Study
Access 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 has
made to the alma mater of the Chairman of the Board of Directors and Chief
Executive Officer. Describe the disclosure and explain why the event is an
“Other Related Party Transaction.” [Download the 10-Q in text format and
apply the Find capability in your word processor. Also access FARS and
identify the guidance relevant to each event.] Health Insurance, Public Policy, and
Backdating
A key factor in the health care industry is health insurance. Public policy
has debated universal health care, changes to governmental programs such
as Medicare, adjustment of tax policy regarding employers’ and employees’
deduction for premiums, and alternative approaches to this sector of the
economy. State and local governments, under a new accounting rule, have
recently estimated their total retiree health bill to be about $1.1 trillion.
Over the past decade, some governmental units used pension funds to help
pay for double-digit growth in health care for retired public workers.
Explain how accounting interacts with public policy. Use FARS as a
resource, according particular attention to FAS 158.
Health insurer UnitedHealth has been the focus of media coverage
involving what is known as the “options backdating scandal”.
UnitedHealth’s internal probe estimates its past decade exposure at half a
billion dollars (“UnitedHealth Faces Formal Probe,” Wall Street Journal,
December 27, 2006, p. B8). Is there a relationship between the magnitude
of the restatement and the nature of the health care sector of the economy?
Explain. The SEC’s Division of Corporation Finance shared a “Sample Letter
Sent in Response to Inquiries Related to Filing Restated Financial
Statements for Errors in Accounting for Stock Option Grants” dated January
2007