On December 30, 1998, Ernst and Young, LLP issued the Report of Independent Auditors for CareGroup, Inc. and its subsidiaries, known collectively as CareGroup. CareGroup’s operating statement showed a loss on operations of over $34 million and a decline in the entity’s net assets of more than $104 million.
These losses contrasted sharply with comparable figures for the prior two years. In 1997, there was a gain on operations of almost $28 million and an increase in net assets of over $50 million. In 1996, the operating gain was over $45 million and the net asset increase was over $101 million. In effect, the worsening financial performance between 1996 and 1997 had become even more severe between 1997 and 1998.
In the early 1990s, the passage of a Massachusetts law known as Chapter 495, had eliminated a great deal of state regulation, resulting in intense competition within the healthcare industry. Similar to the rest of the country, the northeast also had seen a significant shift from indemnity insurance to managed care. The result was the existence of several dominant managed care organizations, including Harvard Pilgrim Health Care, Blue Cross and Blue Shield of Massachusetts, and Tufts Associated Health Plan. In addition, changes in the Medicare payment system had put increasing pressure on providers, especially hospitals, and the state’s Medicaid Program, as in many other states, remained a below-cost payer for most hospitals.
These changes, as well as other environmental pressures to reduce healthcare costs and increase the level of accountability, had led to a series of mergers and strategic alliances in the greater Boston area. Two major hospital-based systems—Partners Healthcare and CareGroup, Inc.—dominated the market, although there also were several other key players including Lahey Clinic, Caritas Christi Health System, and a number of independent providers that continued to compete in the market.
The two large systems as well as the smaller ones were constantly forming alliances with local community based hospitals and physician practices. Thus, while the hospital-based systems appeared quite different on the surface, they all were focused on gaining market share by expanding their community based networks. . . .
- Starting with the $45,789 excess in revenues over expenses for 1996 in Exhibit 1, make sure you see how the four statements are linked. That is, the $45,789 is also included on Exhibit 2, and is combined to give totals for the unrestricted fund. The increase in net assets for 1996 for all funds is then contained on Exhibit 3 and is reconciled to the change in cash, which is used to compute the cash balance that appears on the balance sheet on Exhibit 4. Make sure you understand all of these linkages.
- Note that, although there was $27,878 excess of revenue over expenses in 1997, the cash balance declined by $5,287. Why is this?
- Explain the causes of the decline in excess of revenues over expenses between 1996 and 1998.
- Perform a ratio analysis, using the unrestricted fund only. To do so, assume that the entire net asset figure for temporarily and permanently restricted funds each year is contained in the asset account labeled “Held for specific purposes and endowments.”
- What are the three most significant accounting issues that CareGroup faced in assembling its 1996, 1997, and 1998 financial statements? How have the auditors addressed these issues?
- What, in your opinion, are the three most significant financial management issues that CareGroup faces as it enters its 1999 fiscal year?