In January 2001, Dr. Mark Amsted, Chair of the Obstetrics and Gynecology at Brookstone Medical School, Chief of Ob-Gyn at Brookstone Medical Center, and President of Brookstone Ob-Gyn Associates (BOGA), was preparing to meet with the Harris National Bank. He planned to present a request for a $300,000 line of credit, the approval of which was critical to BOGA’s continued operations. He had discussed the need for the line of credit with the Dean of the Medical School, and had obtained approval to make the request to the bank, but he was by no means certain that the bank would agree to the loan. A great deal depended upon the bank’s reaction to the financial information that he and his business manager, Randy Weber, planned to present.
BOGA was a faculty practice plan comprised of university faculty physicians in obstetrics and gynecology (Ob-Gyn). All BOGA physicians were on the staff of Brookstone Medical Center (BMC), one of the city’s major teaching hospitals. The hospital was affiliated with the Brookstone Medical School, and all of BOGA’s physicians held faculty appointments in the medical school.
BOGA had been organized several years earlier as a nonprofit educational trust. Initially, its offices had been located in the hospital, and it had grown slowly. During its first few years of existence, BOGA’s physicians saw mainly Medicaid, Medicare, and self-pay (or uninsured) patients in the hospital’s outpatient department.
In the mid to late 1980s, many local Ob-Gyn specialists discontinued their obstetrics practices because of high malpractice insurance premiums. At about same time, Brookstone Medical Center began to see declining Ob-Gyn admissions due to competition from some nearby community hospitals. As a result, BMC offered to contribute $1 million to BOGA if it would open offices in a nearby building. The idea was to make BOGA’s facilities more attractive to patients with private insurance. The medical center hoped these patients would use its services. If the idea worked, BMC would reverse the declining trend in its Ob-Gyn admissions, and would do so with fully-insured patients. After discussing BMC’s proposal with his colleagues, Dr. Amsted accepted the offer.
Dr. Amsted supplemented the $1 million contribution from the medical center with a long-term note from the Harris National Bank. The funds were used to purchase new medical and office equipment, renovate the space, and furnish the offices in the new facility.
The surrounding community responded positively to BOGA’s move. The reputation of BOGA’s physicians and the attractiveness of the new facilities led to increases in the number of private insurance patients treated. In both 1999 and 2000, revenue increased by some 20 percent over the previous year.
Despite the growth in revenues, BOGA’s profitability was becoming an issue. Indeed, as he began to prepare for his meeting with the bank, Dr. Amsted was quite perplexed. He commented: . . .
- Using the accrual system, prepare an operating statement for 2000 and a balance sheet as of 31 December 2000 for BOGA. What do these statements tell you about BOGA’s profitability?
- In the absence of the bank’s stipulation that accrual be used, which type of system—modified cash or accrual—would you recommend that Dr. Amsted use for BOGA? Why?