Gentiva Health Services Financial Analysis - Term Paper Example

? Gentiva Health Services Financial Analysis Report Financial performance is a measure of how well a given organization is performing in relation to other companies. An analysis of the financial status, revenue cycle and financial management is a process used by many companies in order to find out their financial strengths or weaknesses. Once a financial performance analysis has been done, then the company can move on to make investment decisions. Thus, financial performance analysis helps in facilitating decision making in an organization. This paper evaluates the financial performance of Gentiva Health Services Company. The paper is divided into the following sections: background information, revenue analysis, financial analysis and management. Finally, the last section gives a conclusion based on the author’s point of view on the soundness of the company’s activities. Outline Outline 3 Background Information 4 Operating Revenue 5 Financial Management 7 Sources of capital 8 Capital Expenditure Management 9 Financial management analysis 9 Conclusion 11 Background Information Gentiva health services provider is one of the largest health care and hospice providers in the majority of the states in America. In 1971, Gentiva launched its home healthcare business and under the umbrella of Olsten Corporation, a split took place in March 2000 separating Olsten and Gentiva Health services, which is now one of the largest health service providers in the nation and ranked among the ten largest after acquiring The Health field Group, Inc., in 2006. Gentiva Health Services provides hospice services throughout 420 locations and at least forty-one states. These services include skilled nursing, hospice services, nutrition, social work, and disease management education. The company also takes part in assisting needy people in their daily living activities. The proposed introduction of the health services reform that requires health service providers to cut down service charges has tremendously affected the organization’s business. In response to the proposed regulation, the organization sold thirty-four of its branches in 2011 and has sold another bunch of ten branches in 2012. As a result of these sales, there are short lived and long-term effects on the expenditures and revenues earned by the company (financial performance). The effects of the recent acquisitions and dispositions on short term securities are evident on the balance sheet totals. These dispositions have reduced the short term securities owned by the company. Part of the accrued benefits from the sale of its branches has been directed to make strategic acquisitions in pursuant of increased fixed assets portfolio. Following the closure of some branches, there is a reduction in accounts receivables as a result of reduction in numbers of customers served by the closed branches. Newly acquired branches may take time before they build a substantial number of customers. Gentiva company endeavors to venture into new market niches, this implies an increase in the inventory of the company. Overall cost of running the company may immensely reduce as a result of the reduction in the workload due to closure of some branches. Closed branches will reduce accrued revenue and expenses for the company. New business ventures require new employees; initially this may raise the running expenses especially due to training costs. With the expansion, the company will reduce operational costs and expenses and claim a high market niche. To retain its relevance in the presence of the reduced health service charges as indicated by the health reform, each service provider must engage extra efforts; else, most of the service providers may find it difficult to cope with the incorporation of the new law. This paper gives an analysis of the activities of Gentiva Health services in relation to revenue management, financial analysis and financial management with an aim to evaluate the soundness of the organization’s financial status. Operating Revenue The management of revenues and expenses is a critical area for any management group. Sustaining the viability of the business in the current economic crisis and downturns is not easy. Thus, for any business to remain relevant in a market, it must utilize proper revenue management practices that will ensure that it will survive the uncertainties that are common in the marketing environment. The vast size and immense numbers of Gentiva customers’ base maintains its comparative advantage in the market and helps fund compliance with new regulatory mandates. The top management evaluates performance and assigns resources depending on operating contributions of the operating segments, which includes corporate expenses, amortization, depreciation and interest expense (Gentiva health services, 2012). Like any other health service provider, Gentiva has not been left out by the effects of declining patients’ volume, rising uninsured population and expected tightening of Medicare payments. To manage this trend, Gentiva embarks on different strategies aimed at revenue cycle management. These includes, optimizing productivity, reducing no-show patients, offering outstanding customer service to patients and offering flexible payment policies (Gentiva health services, 2012). The organization uses automated billing to cater for its customers. Too much automation of customer services can create negative goodwill; consequently Gentiva tries to maintain a balance between the level of automation and the customers’ goodwill. The organization has made tremendous efforts in improving its access management. Use of financial solutions to determine insurance eligibility and ability to pay medical costs has also been employed. Through improved workflow processes, the organization evaluates the coverage for payments and risks involved prior to scheduling of resources so as to get optimal benefits in offering services. Gentiva has gone a mile ahead in responding to consumerisms. Provision of online statements, making electronic payments and access of healthcare portals are some of the methods that the organization employs in meeting customer demands. Accelerated cash collection and payor performance have also been engaged. Uses of electronic claim processing and sophisticated accounting tools have enhanced management of contracts. The implementation of the aforementioned methods has played a significant role in ensuring that the services provided by Gentiva remain relevant in the preset economic upheavals. There are concentrated efforts to manage the account receivables of Gentiva. From the financial reports as at 31st march 2012, there is a significant increase of account receivables from $290589 in 2011 to $312768 in 2012. This does not portray a reliable trend but simply implies that the company is sinking into debts. The company employs different methods to reduce its accounts receivables including use of hardcore collections, verification and prior authorization. Several employees’ trainings have been used to decrease employees’ turnaround. To manage its accounts, Gentiva is embarking on setting up machinery that will target the provision of services to the ageing American population. The health care reform requires that all the health service providers lower their charges by at least 3.5% every year with effect from 2014. This will adversely affect many health service providers and may lead to their closure. Amount of revenue accruing from the provision of services will be reduced significantly under this reform. Medicare Service providers, which are not well established, will hardly continue offering these services. The law is designed to extend health care services to millions of uninsured Americans, but does not consider the inflation that threatens to bankrupt the country. New pilot programs intended to make coverage more affordable for individuals and chances to experiment new cost-lowering technologies forms the key drivers of the law. The costs required to lower these services will probably be shifted to taxes levied on businesses and commodities. This will in turn raise the cost of doing businesses and may lead to inflation. Financial Management It is the duty of every management team to adopt fiscal measures that will ensure that the finances of an organization are properly utilized. The success of any organization is pegged on the quality of financial decisions that the management makes. Depending on the size and structure of the company or an organization, the process of making decisions may either be complex or simple. In large organizations, many consultations have to be made prior to any decision. For smaller organizations, the decision making process is simple and non-consultative. Pertaining decisions on financial management, the key critical areas that require attention include sources of capital and capital expenditure management. To understand the way Gentiva manages its finances, an evaluation of the company on the above basis is given below. Sources of capital The key sources of revenue for Gentiva Company are owners’ equity, capital gains, retained earnings, shorter and long term borrowing among others. The company must therefore, maintain a strong rapport with the funding institutions in order to continue acquiring benefits of borrowing. Owing to the large network of customers that are served by the company, the amount of revenue accruing from operations forms a major source of revenue to the company. This revenue is retained to aid in operations of the company. Apart from accessing capital from the business returns, there are a number of ways that an organization can use to access capital. For instance, not- for – profit organizations may receive donations from well wishers, tax exemption from the government, and subsidies from the state to be used as capital. Another way of raising capital is through employment of volunteers who get stipends. This enables the company to save an enormous amount of cash that can be incorporated as capital. Other companies may raise funds through membership/service fees or grants. Not-for- profit organizations re-invest all the profit accruing from their activities. This forms an essential part of the capital. With the large amounts of profits realized by Gentiva services, it is possible to come up with enough capital to run the business ceteris peribus. Capital Expenditure Management The capital acquired from the aforementioned sources is used either for expansion or for day to day running of the company. Company’s activities are varied and may entail provision of services to customers or to workers within the organization. In response to the proposed health reform law, Gentiva has engaged in numerous operations and restructuring in order to gain stamina in facing the reform. The company has made several acquisitions and integrations in 2011 and 2012. Conspicuously, it can be seen that the company places unique emphasis in strategic alliances and management structures. Thus, the capital acquired in the company is directed to further development within or without the company. Financial management analysis In the past two years, Gentiva has experienced significance changes in its financial performance. This is largely dependent on the strategic changes that the organization has decided to implement. Considering the financial results of the 2011 and 2012 periods, the following analysis can be reached. The company registered a 6% decrease in revenue for the third quarter of 2012 compared to the same period 2011(from $449.7million to $424.4 million). The loss from continuing operations decreased tremendously from $15.82 per diluted share in 2011 to $0.02 in 2012 third quarter. The company recorded $19.1 million non-cash write-off in connection with a rebranding of its operations into one name. For the same period in 2011, the company registered a $643.3 million for a non-cash impairment of a failed test of its goodwill. The company sold 9 health branches and closed 25 home health branches as well as 9 hospice branches, all in different locations. This move was reached after a comprehensive structure analysis aimed at responding to challenging Medicare reimbursement rate environment. Moreover, the company closed four more home health branches in 2012. In response to these closures and sales, the financial results of the second quarter and first six months reduced by approximately $22 million and $41million respectively in 2012 compared to the same period in 2011. Though, the first quarter of 2012 represented 182 (29 days in February 2012) working days compared to 181 working days in 2011, the company revenues went down significantly in 2012 (Gentiva® Health Services Reports Third Quarter 2012 Results). The company has maintained a favorable cash balance for the year 2011 and 2012. Its total assets reduced due to the sale of the 34 branches in 2011 and 10 branches in 2012. It is evident from the revenues accrued in first six months of 2011 and 2012, that the company has instituted measures to manage its costs. The sale and closure of the various branches has enabled the company to significantly cut-down its expenditures. With the reduced expenditures, the company has moved ahead to make more acquisitions to counter the reduction in revenue arising from the closure of the hospice and health care branches that took place in 2011 and early 2012. Its ability to record capital gains and huge profits is also an indication to verify that the company manages its costs effectively. Nevertheless, the health care reform is a forceful measure that may affect many health service providers, Gentiva included. Thus, it is not satisfactory to say that the company can totally manage its costs before the health care reform comes into force in 2014. The Company received earnings amounting to approximately $5.9 million in the second quarter and recognized a receivable of about $0.5 million in 2012. In the second quarter of 2012, 8 home health branches and 4 hospice branches were sold in Louisiana. This was done pursuant of an asset acquisition worth $6.4million. The completion of this deal made significant changes in the financial results of the company. The immediate result was reduction in short term assets to the company followed by a long term increase in the fixed assets of the company. Expenditures for the same period were also high compared to the same duration last year. The company also realized a $5.4 million in May this year in connection to the sale of Gentiva consulting business to MP Health care partners. The charges paid out by the company have risen significantly this year. The charges were as a result of restructuring activities, acquisition and integration activities, as well as legal settlement charges. The total charges amounted to $5.4 million in the first half of 2012 and a total of $46.2 million for the first six months and the second quarter of 2011. In the first six months of 2011 and 2012, the company’s effective tax rate rose from 38.8% to 39.3% respectively. Had it not been for the tax adjustment, the effective tax rate would have remained at 40.8% for half year results in 2012 (Form 10-Q for Gentiva Health Services Inc 2012). The payments and fees for the company increased significantly in 2012 due to the legal fees ($25million) paid by the company to the government Conclusion From the financial performance analysis, it can be noted that Gentiva has numerous sources of revenue at its disposal. Proper management of these revenues is necessary for the company as it approaches 2014, and year when a significant change is likely to occur in the health service providers sector. An analysis of the soundness of the organization’s financial performance is vital for future relevance of the company. To sustain customer satisfaction and retain a considerable portion of a market, the organization is obliged to evaluate its potential weaknesses and strengths so as to make necessary adjustments. From quick ratio test and acid test ratio of the 2011 and 2012 financial results of Gentiva, it is notable that the organisation can pay for its debts using the internal sources. The company has also indicated positive growth in the level of profits, which is a reliable indicator of financial soundness. From the financial ratios analysis, it can be argued that the company is financially sound. The Company aims at targeting to serve the rising numbers of aging population in the US. There are many people who are in their late stages and therefore, the company targets to reinstate its focus on this segment of the society. In regard to the several sales and acquisitions, I strongly believe that the company is consolidating its resources to ensure that it remains strong and relevant, even when the new reform is initiated in 2014. According to me, the current financial status/performance of Gentiva is well fit for the Company as it matches to welcome the health reform. References Gentiva Health Services. “Gentiva Health Services Reports First Quarter 2012 Results.” Web Mar 2012 Retrieved from http://investors.gentiva.com/releasedetail.cfm?releaseid=669974 Read More