Maria Ortiz

Case 1
Commonwealth Health Plan
Financial Management Course
W16 FIN3402.051
Professor: David Harloff

Commonwealth
Health Plans
Assessing HMO Performance
Maria Ortiz

Maria Ortiz
Case 1
Commonwealth Health Plan
Financial Management Course
W16 FIN3402.051
Professor: David Harloff

Introduction
Commonwealth Health Plans, among the largest not-for-profit managed care
organizations of the state of Virginia offers prepaid medical services to more of 500,000
members in 17 counties. Commonwealth has been rated by the National Committee for
Quality Assurance as excellent in its three main areas: clinical performance, member
satisfaction and key structures and processes. Commonwealth greatest portion of revenue
comes from its commercial HMO, with almost the 50% followed by Medicare HMO with
39%. But, Commonwealth competes with four other Managed Care organizations in
Virginia, being WellLife the most prominent, serving 23 counties and a total enrollment
of 516,858 patients. Robert Osborne, the chief executive officer of Commonwealth has
asked me to do a brief financial statement and operating indicator analysis of
Commonwealth Health Plans.
Statement of Cash Flow
Unfortunately, the 1012 Statement of Cash Flows is missing. It is not possible to know if
it has been an increase of decrease in net cash flow from one year to the next. In 2013
there is a net cash flow from operation in the order of 27. 8 millions of dollars. Income
from operations is the account that contributed with the largest sum of money for this net
cash. It is important to note that 3.7 million of dollar in premiums receivables means that
Commonwealth didnt collect the cash from its services. As a prepaid managed care
organization undercapitalization lead to financial shortfall and regulators could suspend
and even revoke its license. We know than at the beginning of the period Commonwealth
counted with 37.2 million dollars in cash and at the end of the period the amount is
reduced to 27.2 million dollars. Observing the Statement of Operations, we can note that
medical costs increases notably by $28 million in one year. And selling/administrative
expenses increased by 7 million. The Cash Flow from Investment and Financing had a
negative fiscal year with 24.9 million dollars in negative number and 12.9 due to payment

Maria Ortiz
Case 1
Commonwealth Health Plan
Financial Management Course
W16 FIN3402.051
Professor: David Harloff

of long-term debt, which at the same time is good for the financial balance.
Commonwealth had a steady almost parallel increase in Revenue and Expenses through
the periods 2012-2013

Statement of Cash Flows (2013):

(Millions of Dollars)
CASH FLOW FROM OPERATIONS
Income from operations
Depreciation expense
Increase in premiums receivable
Increase in medical costs payable
Increase in payables/accruals
Net cash flow from operations

$20.7
5.0
(3.7)
3.9
1.9
$27.8

CASH FLOW FROM INVESTING

Fixed asset acquisitions
Increase in marketable securities
Net cash flow from investing

($6.7)
($18.2)
($24.9)

CASH FLOW FROM FINANCING

Decrease in long-term debt
Net cash flow from financing

(12.9)
($12.9)
3

Maria Ortiz
Case 1
Commonwealth Health Plan
Financial Management Course
W16 FIN3402.051
Professor: David Harloff

Net increase (decrease) in cash

Beginning cash
Ending cash (calculated)

($10.0)
37.2
$27.2

Actual ending cash

$27.2

DuPont Analysis
2012
3.67%
2.78
10.21%
3.13

Total margin
Total asset turnover
ROA = PM x TATO
Equity multiplier
ROE = ROA x Equity
multiplier
31.96%
ROE (Check figure)

31.96%

2013
5.73%
2.84
16.27%
2.23

Industrial Avg.
2.90%
3.10
8.99%
3.16

36.32%

28.41%

36.32%

Through the DuPont analysis we can see how much Commonwealth has earned
compared with the equity invested. Total margin, Total Asset Turnover, Equity multiplier,
return on equity (the key factor) will give us the picture of the financial condition of
Commonwealth.
According to total margin percentages, Commonwealth has increased its earning for each
dollar of revenue from 2012 to 2013 by 2.06%. For each dollar in revenue in the year
2013 Commonwealth is earning 5.73 cents, and it is higher than the industrial average by
2.83%. adding to this, TM is ranking on top of the upper 25th percent quartile making
Commonwealth very efficient on its expense control. The total asset turnover will show
how much revenue assets generates to the organization. For each dollar of assets
Commonwealth generated 2.84 cents slightly increasing revenue from last year but still
lower than the industry average. Commonwealth should analyze the possibility of
updating the organization assets through selling or buying more necessary equipments

Maria Ortiz
Case 1
Commonwealth Health Plan
Financial Management Course
W16 FIN3402.051
Professor: David Harloff

and fixed assets, to look for increase in revenue in this area. In the two consequent years,
Commonwealth has been place below the 50th percent median quartile probably due to
many fixed assets that are not generating enough revenue. Equity multiplier will show us
the financial leverage of Commonwealth, the purchase of assets through debt or through
equity. In 2013 the equity multiplier has decreased by .89% and is lower than the industry
average meaning that it has been purchasing assets mainly through equity maintaining
debts in the low range. In 2013 Commonwealth is located under the 25th lower quartile
debt ratio. The return in assets ratio, the profitability ratio, will tell us how much net
income has been produced by the total assets of Commonwealth. In 2013, the return on
equity has an extraordinary amount of 16.27% almost the double than the industry
average, making its asset utilization of optimal efficiency. The organization should
evaluate if more assets should be bought. Are assets working overcapacity? Finally, as we
can see in the return on equity measures how efficient is Commonwealth in generating
profits from its investors/shareholders. In 2013, the ROE is placed 7.91% over the
industry average making investments very profitable.
Days Cash on Hands
Year
days
Upper Quartile
2013
29.6
32.7
2012
45.3
32.7
We observe that the liquidity ratio of Commonwealth has decrease by 15.7 but we have to
remember that the organization paid long-term debts making a decrease in cash flow.
2012 Commonwealth was positioned way over the 25th percent upper quartile in liquidity
ratio but the year 2013 was 3.1 under the upper quartile but still very efficient.
Commonwealth could operate almost for one month without any incoming capital.

Operating Indicator Analysis

Medical Loss Ratio
Year
2013

Ratio %
85.7

State Average
67.1
5

Maria Ortiz
Case 1
Commonwealth Health Plan
Financial Management Course
W16 FIN3402.051
Professor: David Harloff

2012

86.4%

Variance in %

-.7%

68.6

Commonwealth has been positioned toward the upper quartile at the national level for the
two consecutive years 2012, 2013 way higher than the state average ratio. This ratio
measures the premium revenue utilized in patient medical care services. These ratio
percentages satisfy the Affordable Care Act mandate that requires medical plans to spend
at least 85 % of premiums on medical services. But Commonwealth must watch its
medical service offerings and decrease the proportion of premium expenses on health
care service to the Virginia community if it wants to maintain a profitability level. The
term Medical Loss Ratio should be changed for a more customer driven terminology.
Medical Utilization Ratio perhaps sounds more quality-service driven ratio especially
on the realm of not-for-profit health plans.
Administrative Cost Ratio
Years
2013
2012

Percent

State

Median

12.8
12.1

Average
17.4
15.5

Quartile
12.0
12.0

The percent of administrative cost ratio have increased in one year (.7%) but it is very
low compared to the state average differing by 4.6%. We have to remember that at lower
ratio higher profitability. Commonwealth is providing the needed administrative support
in an efficient way but should watch administrative cost increase.
Percent Inpatient Expense
Year
2013
2012

Percent
26.5
26.5

State Average
23.3
25.2

Maria Ortiz
Case 1
Commonwealth Health Plan
Financial Management Course
W16 FIN3402.051
Professor: David Harloff

Commonwealth is over the percent Inpatient Expense state average. The inpatient
services play a heavy role in the overall Commonwealth expenses but is a stable
percentage. Inpatient expense has not been increasing from one year to the next. It should
be advisable to revise these expenses in order to make it more profitable. But we
shouldnt forget that the not-for-profit nature of this organization makes it less profitable
in terms of inpatient expenses.
Percent Physician Expense
Year
2013
2012

Percentage
37.3
41.2

State Average
31.6
31.1

According to these amounts, physician expenses has decreased in 2013 and is higher than
the state median. The operating expenses for physician expense is justified due to the
nature of Commonwealth organization as a not-for-profit organization, but has decreased
compared to last year by 3.9%. Its two stronger competitors Sparta and Well life have a
higher rate of physician expenses but we have to remember that a larger number of
customer implies more expenses for the organization.
Other Medical Expense
Year
Percentage
State Average
2013
21.9
12.5
2012
18.6
14.6
Commonwealth is over State average by almost 10% but way under its main competitor
Sparta which expenses are 35% but Commonwealth could improve this number.
Commercial and Medicare Revenue (PMPM)
Year

Amount

Competitor

Well life

State

Sparta
Average
2013
127.90
88.41
108.68
101.17
Commercial
2012
127.82
95.06
110.19
102.53
2013
449.37
N/A
421.57
376.04
Medicare
2012
437.23
N/A
406.27
365.12
Commonwealth has a very high amount of Medicare utilization. Medicare is known for
low payment on services and slow in payment. Compared with competitors
7

Maria Ortiz
Case 1
Commonwealth Health Plan
Financial Management Course
W16 FIN3402.051
Professor: David Harloff

Commonwealth is at the top on Medicare utilization, meaning that it has a high rate of
older patients and it is increasing. But it is also well situated in commercial premium
revenue positioned on top of its stronger competitors and over state average.
Commercial & Medicare Inpatient Days per 1,000 Enrollees
Year
2013
2012
2013
2012

Amount

Competitor

266.4
302.9
1,418.1
1,622.4

Sparta
248.9
198
N/A
N/A

Well life

State

246
245.4
1,323.8
1,338.4

Average
237
278
1,375.5
1,432.1

Commercial
Medicare

Commonwealth ranks higher in hospitalization. It is probably due to its high number of

Medicare enrollees, older patients with highest risk of hospitalization. Commonwealth
ranks higher than the state average and surpass its two main competitors in
hospitalization of patients.
Commercial and Medicare Physician Encounter per Member
Year

Amount

Competitor

Well life

State

2013
2012
2013
2012

4.0
4.1
10
9.9

Sparta
3.6
3.5
N/A
N/A

3.6
2.2
9.6
9.8

Average
3.8
3.8
9.1
9.8

Commercial
Medicare

Commonwealth is ranking higher in Physician Encounter per Member in both types of

health plans and are over the state average. Physician of Commonwealth are the most
active in relating with patients. Probably, Commonwealth has a good reputation in the
community as very engaging with its patients.
Summary and Recommendations:
Commonwealth is a managed care that has been managed efficiently, having one of the
lowest debt ratio and a high liquidity. The control over its debts makes the organization
very attractive to investors and creditors. On the other side, it ranks among the highest in
inpatient rate and medical expenses. It is recommended to evaluate the physician medical

Maria Ortiz
Case 1
Commonwealth Health Plan
Financial Management Course
W16 FIN3402.051
Professor: David Harloff

services offered to their patients, it could be unnecessary services added to the plans and
over utilization of other type of services by the medical staff. It seems that a large number
of Commonwealth clients are older according to the high number of Medicare enrollees.
Older patients treatment cost is generally higher than other type of patients. It could be
recommendable to target younger customers to balance the medical expenses toward a
more profitable number, and reduce the hospital stay of patients through revision of
medical service necessity. Total assets turnover being near the 25th percent of lower
quartile showed a low asset utilization. Commonwealth should asses its asset utilization
to increase its utilization rate, probably the slow collection of account receivable (maybe
Medicare) make the turnover low. But in general the organization is efficient and
profitable, with small adjustments that could make it a very profitable organization in the
future.