Bowen Family Theory Questions

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CASE 3: Charitable Contributions and Debt: A Comparison of St. Jude Children’s Research Hospital/ALSAC and Universal Health Services

CASE TOPICS OUTLINE

1. St. Jude Children’s Research Hospital/ALSAC

A. Primary Objective

B. Sources of Capital

C. Reporting Practices

2. Universal Health Services

A. Investor-Owned Hospital

B. Debt Including Leases

3. Comparison

Hospitals are an industry in which both not-for-profits and investor-owned

facilities operate. The sources of capital available to the not-for-profits include

charitable contributions and debt offerings—unless they are governmental, in

which case, higher taxes are also an alternative. Debt availability is always, in part,

a function of performance, and just as failures have arisen in both sectors, about

one-third of the investor-owned hospitals have been described as losing money. Of

interest is how can one effectively evaluate such an industry, with this type of

diversity in organizational forms and capital availability? A necessary prerequisite

to such an evaluation is to have a firm understanding of how charitable

contributions are presented.

St. Jude Children’s Research Hospital/ALSAC has the mission of finding cures for

children with catastrophic diseases through research and treatment. For the fiscal

year 1999, this entity reported total assets of $221,664,232 and income of

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$177,071,890. A Web site at http://www.stjude.org, as well as Guidestar’s listing,

references a Form 990 (Return of Organization Exempt from Income Tax) filing,

availability of audited financial statements upon request, and information that the

hospital has 2,100 employees and 350 volunteers. Founded in 1962, the

organization seeks funds

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from contributions and grants for unrestricted operating expenses, specific

projects, buildings, and endowments. More than 4,000 patients are seen annually,

with a hospital maintaining 56 beds. The Form 990, Part III states that the hospital

provided 15,231 inpatient days of care during the fiscal year and patients made

40,982 clinic visits. ALSAC is the American Lebanese Syrian Associated Charities,

Inc., the fund-raising arm of St. Jude Children’s Research Hospital. It reported 1999

total assets of $1,007,699,320 and income of $274,123,399. This organization reports

the number of employees as 565 and the number of volunteers as 800,000. With its

sole focus on the hospital, ALSAC’s self-description explains that no child has ever

been turned away due to an inability to pay for treatment and explains key

accomplishments in the research area achieved by St. Jude’s research and

treatment of children with catastrophic diseases. What is borne out by the example

of St. Jude is the fact that a review of the Form 990 filed for the fiscal year ending

6/30/99 indicates in Part VI the names of related organizations: ALSAC and St. Jude

Hospital Foundation, both of which are tax exempt. To gain a sense of capital

availability to a not-for-profit entity, affiliated entities must be considered. In

addition, the role of volunteers is a source of human capital not effectively

captured within the framework of financial statements for not-for-profits, as

reflected in the Form 990 for the fiscal year ending 6/30/99 for ALSAC, which states

in Part VI: Bowen Family Theory Questions

Unpaid volunteers have made significant contributions of their time, principally in

fund-raising activities. The value of these services is not recognized in the financial

statements since it is not susceptible to an objective measurement or valuation and

because the activities of these volunteers are not subject to the operating

supervision and control present in an employer/employee relationship.

Hence, as one evaluates capital sources and uses by not-for-profits, care is needed

to consider affiliated organizations’ role, total contributions, and the effect of

volunteerism on the comparability between not-for-profit and investor-owned

operations. Bowen Family Theory Questions

Universal Health Services, Inc. filed its 10-K on March 28, 2001, for the calendar

year 2000, which includes comparative information for 1999. Analysts have

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described the company as the most aggressive company in the industry over the

1999–2001 time frame in making acquisitions, particularly of not-for-profit

operations and investor-owned operations experiencing losses. The company is

praised for it high operating leverage, the relatively small number of shareholders

relative to the magnitude of total revenue, and stock price as a multiple of

earnings. The company operates 59 hospitals and, as of 1999, had an average

number of licensed beds of 4,806 at acute care hospitals and 1,976 at behavioral

health centers, with patient days of 963,842 and 444,632, respectively. Of interest is

a commentary on the competition found in the company’s filing:

Competition

In all geographical areas in which the Company operates, there are other hospitals

which provide services comparable to those offered by the Company’s hospitals,

some of which are owned by governmental agencies and supported by tax

revenues, and others of which are owned by nonprofit corporations and may be

supported to a large extent by endowments and charitable contributions. Such

support is not available to the Company’s hospitals. Certain of the Company’s

competitors have greater financial resources, are better equipped and offer a

broader range of services than the Company. Outpatient treatment and diagnostic

facilities, outpatient surgical centers and freestanding ambulatory surgical centers

also impact the healthcare marketplace. In recent years, competition

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among healthcare providers for patients has intensified as hospital occupancy

rates in the United States have declined due to, among other things, regulatory and

technological changes, increasing use of managed care payment systems, cost

containment pressures, a shift toward outpatient treatment and an increasing

supply of physicians. The Company’s strategies are designed, and management

believes that its facilities are positioned, to be competitive under these changing

circumstances. (Source: 10-K filed 3/28/2001)

Financial information is provided in Tables 5.3-1 and 5.3-2 for both the not-for-

profit and the investor-owned hospitals. Bowen Family Theory Questions

Table 5.3-1: Financial Comparisons of the Not-for- Profit Entities

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Fiscal Year Ended 1999

St. Jude Children’s

Research Hospital Form 990*

American Lebanese Syrian Associated

Charities, Inc. (ALSAC) Form 990*

Contributions, gifts, grants and similar amounts received: Direct public support

$91,978,426 $231,793,748

Indirect public support    2,906,934

Government contributions (grants)

31,469,447

Program service revenue, including government fees and contracts (i.e., health insurance revenue)

46,034,710

Accounts receivable 24,217,029    4,230,764

Pledges receivable   23,604,748

Allowance for doubtful accounts

9,363,328

Program service expenses   99,282,906

Program service expenses: Research

87,225,830

5,471,186

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Fiscal Year Ended 1999

St. Jude Children’s

Research Hospital Form 990*

American Lebanese Syrian Associated

Charities, Inc. (ALSAC) Form 990*

Program service expenses: Education and training

Program service expenses: Medical Services

93,735,602

Reconciliation of revenue, gains, and other support to audited numbers: net unrealized gains on investments

−4,023,815   65,891,269

Deferred grant revenue  1,857,628 (Statement 5)

Support from American Lebanese Syrian Associated Charities, Inc.

91,978,426 (Statement 7)

91,978,426 (paid per Statements 4, 6)

Excluded contributions 2,746,295 (Statement 1)

Excess or (deficit) for the year −10,933,191  120,521,982

Net assets or fund balances at end of year

199,707,440  994,501,910

Temporarily restricted  15,715,890

Permanently restricted 14,000,000 247,147,826

Total liabilities 21,956,792   7,017,192

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Fiscal Year Ended 1999

St. Jude Children’s

Research Hospital Form 990*

American Lebanese Syrian Associated

Charities, Inc. (ALSAC) Form 990*

Schedule of deferred debits & credits by contract (FAS 116 adjustment noted to result in this deferred revenue)

157,628

The GuideStar.org Web site (http://www.guidestar.org) provides access to Forms 990 in .PDF

format.

Table 5.3-2: Universal Health Services, Inc.’s Financial Excerpts*

Income Statements (in thousands) Reported 1999 Calendar Year

Net revenues $2,042,380

Operating charges 1,913,346

Components:

Salaries, wages, and benefits   793,529

Provision for doubtful accounts   166,139

Lease and rental expense    49,029

Interest expense, net    26,872

Net income    77,775

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Income Statements (in thousands) Reported 1999 Calendar Year

Total assets 1,497,973

Total liabilities   856,362

Total retained earnings   482,960

Capital stock       306

Paid-in capital in excess of par   158,345

The 10-K filing as of 3/28/2001 at EDGAR (http://www.sec.gov/edgar.shtml) provides financial

statement information for 2000 and 1999.

Requirement A: Recording Revenue

1. What is meant by the reference in Table 5.3-1 to an FAS 116 adjustment?

2. How are contributions recorded? Is there a distinction between pledges

receivable and accounts receivable?

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3. Are there circumstances when financial statements can quantify volunteers’

services?

4. Can financial statement users of not-for-profit hospitals’ financial statements

expect to be fully informed regarding affiliated parties, such as the linkages

between St. Jude Children’s Research Hospital, ALSAC, and the foundation

cited? Explain.

Requirement B: Revenue Mix (Strategy-Related Considerations)

The 10-K filing of Universal Health Services, Inc. describes the mix of revenue

sources, as depicted in Table 5.3-3.

Table 5.3-3: Patient Revenue Mix

PERCENTAGE OF NET PATIENT REVENUES

2000 1999 1998 1997 1996

Third Party Payors

Medicare 32.3% 33.5% 34.3% 35.6% 35.6%

Medicaid 11.5% 12.6% 11.3% 14.5% 15.3%

Managed Care (HMOs and PPOs)

34.5% 31.5% 27.2% 19.1% N/A

N/A-Not available (Source: 10-K filed 3/28/2001)

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PERCENTAGE OF NET PATIENT REVENUES

2000 1999 1998 1997 1996

Other Sources 21.7% 22.4% 27.2% 30.8% 49.1%

Total 100% 100% 100% 100% 100%

N/A-Not available (Source: 10-K filed 3/28/2001)

1. How does this revenue mix compare with the revenue blend of the not-for-

profit entity, St. Jude Children’s Research Hospital (ALSAC)? Access the latest

SEC filing and compare the reported revenue mix; has it changed?

2. What does that imply as to the strategies of investor-owned hospitals in

managing risk and ensuring adequate capital relative to not-for-profit entities?

An opportunity exists to explore the greater social and political questions that

are frequently debated about the compatibility of profit-oriented entities and

quality of health care, relative to not-for-profit entities. As background, identify

what the latest SEC filings report concerning charity care. Bowen Family Theory Questions

Directed Self-Study

Access the 10-Q (from sec.gov) for the quarterly period ended June 30, 2006 and

explain how Hurricane Katrina affected Universal Health Services. The same 10-Q

reports on a funding commitment the company has made to the alma mater of the

Chairman of the Board of Directors and Chief Executive Officer. Describe the

disclosure and explain why the event is an “Other Related Party Transaction.”

[Download the 10-Q in text format and apply the Find capability in your word

processor. Also access FARS and identify the guidance relevant to each event.]

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Health Insurance, Public Policy, and Backdating

A key factor in the health care industry is health insurance. Public policy has

debated universal health care, changes to governmental programs such as

Medicare, adjustment of tax policy regarding employers’ and employees’ deduction

for premiums, and alternative approaches to this sector of the economy. State and

local governments, under a new accounting rule, have recently estimated their

total retiree health bill to be about $1.1 trillion. Over the past decade, some

governmental units used pension funds to help pay for double-digit growth in

health care for retired public workers. Explain how accounting interacts with

public policy. Use FARS as a resource, according particular attention to FAS 158.

Health insurer UnitedHealth has been the focus of media coverage involving what

is known as the “options backdating scandal”. UnitedHealth’s internal probe

estimates its past decade exposure at half a billion dollars (“UnitedHealth Faces

Formal Probe,” Wall Street Journal, December 27, 2006, p. B8). Is there a

relationship between the magnitude of the restatement and the nature of the

health care sector of the economy? Explain. The SEC’s Division of Corporation

Finance shared a “Sample Letter Sent in Response to Inquiries Related to Filing

Restated Financial Statements for Errors in Accounting for Stock Option Grants”

dated January 2007

(http://www.sec.gov/divisions/corpfin/guidance/oilgasltr012007.htm.) How

helpful do you find such guidance?

Key Terms and Glossary

fund balance

“refers … to a common group of assets and related liabilities within a not-for-

profit organization and to the net amount of those assets and liabilities… .

While some not-for-profit organizations may choose to classify assets and

liabilities into fund groups, information about those groupings is not a

necessary part of general purpose external financial reporting” (CON6,

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Footnote 45); fund balances may refer to such fund groups as operating,

plant, endowment, and other funds (FAS 117, Par. 98).

permanent restriction

“A donor-imposed restriction that stipulates that resources be maintained

permanently but permits the organization to use up or expend part or all of

the income (or other economic benefits) derived from the donated assets”

(FAS 117, Par. 168). Information about permanent restrictions is useful in

determining the extent to which an organization’s net assets are not a source

of cash for payments to present or prospective lenders, suppliers, or

employees and thus are not expected to be directly available for providing

services or paying creditors (FAS 117, Par. 98).

pledges

receipts of promises to give

temporary restriction

“A donor-imposed restriction that permits the donee organization to use up

or expend the donated assets as specified and is satisfied either by the

passage of time or by actions of the organization” (FAS 117, Par. 168).

Separate line items may be reported within temporarily restricted net assets

or in notes to financial statements to distinguish between temporary

restrictions for (a) support of particular operating activities, (b) investment

for a specified term, (c) use in a specified future period, or (d) acquisition of

long-lived assets. Donors’ temporary restrictions may require that resources

be used in a later period or after a specified date (time restrictions), or that

resources be used for a specified purpose (purpose restrictions), or both. For

example, gifts of cash and other assets with stipulations that they be invested

to provide a source of income for a specified term and that the income be

used for a specified purpose are both time and purpose restricted. Those gifts

often are called term endowments (FAS 117, Par. 15).

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Further Readings

Baber, William R., Patricia L. Daniel, and Andrea A. Roberts. 2002. “Compensation

to managers of charitable organizations: An empirical study of the role of

accounting measures of program activities.” Accounting Review (77, 3, July), pp.

679–693. Bowen Family Theory Questions

The Comprehensive Report of the Special Committee on Financial Reporting.

American Institute of Certified Public Accountants. 1994. Improving Business

Reporting—A Customer Focus. New York: AICPA.

Council of Better Business Bureaus (CBBB). 2001. Web site for the Philanthropic

Advisory Service reports. Available at: www.bbb.org/pas/reports.

Governmental Accounting Standards Board. 1990. Service Efforts and

Accomplishments Reporting: Its Time Has Come—An Overview. Washington, DC:

GASB.

Guidestar. 2001. Web site that reports Form 990, Return of Organization Exempt

from Income Tax, information for charities. Available at:

http://www.guidestar.org.

Houle, C. O. 1989. Governing Boards: Their Nature and Nurture. (Washington, DC:

Jossey-Bass and National Center for Nonprofit Boards).

Joos, Peter, and George A. Plesko. 2005. “Valuing loss firms.” Accounting Review

(80, 3, July), pp. 847–870.

Laswad, Fawzi, Richard Fisher, and Peter Oyelere. 2005. “Determinants of

voluntary Internet financial reporting by local government authorities.” Journal of

Accounting and Public Policy (24, 2, March/April), pp. 101–121.

Parry, Robert W., Florence Sharp, Jannet Vreeland, and Wanda A. Wallace. 1994.

“The role of service efforts and accomplishments reporting in total quality

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management: Implications for accountants.” Accounting Horizons (8, 2, June), pp.

25–43.

Peebles, Laura. 2001. “The right philanthropic vehicle.” Journal of Accountancy

(July), pp. 22–27.

Ripperger, Matt. 2001. “Analyst [A director with Warburg Dillon Read’s Healthcare

Research Group] interview: Hospital management services.” Wall Street Journal

Transcript (February 7), Document # LAQ901.

Wallace, Wanda A. 2006. “Financial management in government entails evaluating

nonprofits: Are you ready for the next natural disaster?” Journal of Government

Financial Management (55, 1, Spring), pp. 44–57.

Wallace, Wanda A. 2003. “Avoiding the downfall of windfalls.” Journal of

Government Financial Management (52, 3, Fall), pp. 18–30.

Wallace, Wanda A. 2001. “How accountable are charities for their performance?”

Accounting Today (June 18–July 1), pp. 18, 20. Bowen Family Theory Questions

Accounting deals with a system which is a human creation, designed to satisfy

human needs, and which must therefore, above all, be useful. The accounting

environment is prone to many influences of a nondeterministic nature,

influences related not only to long-term legal, cultural and political traditions,

but also to short-term movements of mass psychology… . The subject matter is

of such diversity and changing complexity that attempts to make predictions in

accounting are akin to the difficulties of predicting the conditions of turbulence

inside a tornado or the problem of “forecasting” next month’s weather.

In principle it is possible for meteorologists to predict the weather at noon in

Chicago on January 1, 1981, just as it is possible in principle to predict an eclipse

of the sun a thousand years hence. In practice, weather predictions (unlike

astronomical predictions) are unreliable over the space of a month let alone a

millennium. Accountants, like meteorologists, are also faced with a complex

world of many interacting bodies. Nevertheless, they might be able to adopt the

pure scientific method, and perhaps enjoy as much success with it as

meteorologists, if—like—meteorologists—they only had to deal with the

behavior of inhuman molecules. But in contrast, the accountant’s “molecules”

think and feel, they have traditions and cultures, they are governed by laws, act

sometimes rationally and often irrationally, and are susceptible to an enormous

variety of psychological, social, economic, cultural, and political influences… .

Accountancy … deals with problems

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involving equity and balance and the resolution of conflict between different

groups of human beings with widely varying interest and objectives.

—Edward Stamp

[Source: “Why Can Accounting Not Become a Science Like Physics?” ABACUS (Vol.

17, No. 1, 1981), p. 21]

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