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.

Return to Document

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.

Return to Document

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:

• There were 153 outpatient safety net providers in our universe.
• Most performance measures were ratio based, so the standard errors of the ratios would determine the sample size.
• Ratios would range between -1 and +2. (This assumption was based on our professional judgment.)
• The desired error of the estimate was 0.25 (i.e., we wanted a 95 percent confidence estimate for x +/- 0.25). We selected 0.25 because that would give us reasonably accurate estimates without having to sample a large number of outpatient safety net providers.

As we did not know the variance in the population or the sample, we assumed that the variance was roughly equal to the .¹

Given the above, the desired sample size is:

, where , , n is the sample size, N is the total population, and B is the desired error of the estimate.² In this particular case:

, 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. 4^th edition. Boston (MA): PWS-KENT Publishing Company; 1990.

² Ibid.

Return to Document

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:

• Revenue Growth is much more important than anything else.
• Uncollectible Accounts Receivable Ratio and Cash on Hand are roughly equally important and somewhat less important than the Debt-to-Equity Ratio.
• Cost per Encounter and Facility Age are not particularly important, but should be considered.

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.

Return to Document