The Healthcare Breakdown No. 001: Breaking down Providence's Income Statement
The Healthcare Breakdown No. 001: Breaking down Providence's Income Statement
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The Healthcare Breakdown
Breaking down topics in business, so you can take back the business of healthcare
What we’re breaking down: Providence Health Income Statement
What you’ll learn: How to read and analyze an income statement
Why it matters: Understand the high-level mechanics of how a business makes money
Read time: 7 minutes
The income statement goes by many names.
The P&L, the profit and loss statement, the statement of operations, and some other obscure ones. No matter its name, it tells you the same thing.
How much money an organization is earning and how much it’s keeping. Well, sort of. But more on that later.
It may seem complicated or your eyes may want to glaze over, but with just a few key points, you’ll be able to Charlie Munger an income statement in no time.
Let’s not just talk about it though. Let’s analyze one! That’s more fun anyways. Cause if it ain’t fun, what’s the point.
Here we go!
This is Providence St. Joseph Healthy System’s most recent income statement:
Don’t freak out.
To start, we only need to look at 3 numbers.
That’s it!
3
Not so bad.
First start here:
Operating Revenue
It’s the money Providence made from the services it offers. Above this line all the revenue streams are broken down, so you can see what makes up the health systems revenue.
Revenue is the money that you get paid.
Thank you, next.
On to number, number 2. Wait, number 2 number? Ummm, the next number….
Operating expenses:
This is what the health system spends to deliver the services that provide the revenue.
You’ve probably heard the term COGS before or Gross Margin. That doesn’t apply as cleanly in a hospital business, because hospitals are service businesses. So COGS is a little different.
Quick detour though… skip if you’re so inclined.
——————
COGS = Cost of Goods Sold = how much the thing you sold cost to make.
You make flip flops, your COGS is the cost to make a flip flop. That’s it.
Gross Margin is how much you make after you pay for the thing you made…. Yikes, sorry that sounds confusing.
It means this:
You sell a flip flop for $20 (revenue).
The flip flop cost $4 to make (COGS).
Your Gross Margin is $16 per flop (Gross Marg…wait, I said that already).
Your Gross Margin % is [(Price – Cost) / Price] * 100
In this case: [(20-4) / 20] * 100 = 80%
That’s a mighty fine margin. You would want to know a number like this to know how much you can spend on other things, like marketing, sales, super high executive salaries, things like that. It’s also important to know for the long-term potential health of a business.
Ok – detour over….
————————
In the hospital, we are going to drop right to the 3rd number that really matters.
Operating Income.
In this case they like to speak like lawyers or a Proust novel, so they call it “Deficit of revenue over expenses from operations before restructuring costs and other.”
Give me a break….
Here it is:
It’s how much money the business has left from revenue after it paid for all the stuff to be able to deliver the service to generate the revenue…. Yikes, sorry, confusing again.
How much of the revenue it kept (or lost) after paying for the services it provided.
There it is.
Now we have the big 3 numbers from the income statement:
Revenue
Operating expenses
Operating income
I know what you’re asking, “what about all these other numbers, Preston? I see more than three numbers here. Non-operating gains? Restructuring? I paid good money for this newsletter, so tell me what the heck I’m looking at.”
You’re right, you’re right. I just wanted to start with the 3 big numbers, so everyone who realized this newsletter isn’t quite what they expected or has decided to bail early, got the three big components.
Here’s a breakdown of the rest:
Restructuring expenses are usually one-time deals. Providence for example is doing a whole big “turnaround.” That’s where costs from that initiative will land.
It gets called out so people know these are unusual expenses and will probably not happen again… Probably.
“Non-Operating gains (losses),” represent money the health system either lost or made from things other than from its core business.
For example, and you will read about this a lot from me, check out investment losses here:
This is a loss from investments the system made. Investments have nothing to do with giving people arterial stents, so it falls under the category of “Non-operating gains (losses).”
Oh, by the way, in finance, losses or negative numbers always show up in parentheses. These things (I am a parenthesis). I don’t know why. Finance people are weird.
One other thing to note. This breakdown is specific to the non-profit hospital income statement. A for-profit statement will look a little different. Since most hospitals are non-profit, we’ll focus here for the time being. And with this framework, you can read a for-profit statement no problem. The main difference will be taxes, which is taken out from after operating income to derive Net Income.
And those are the basics that you can now use to analyze and understand financial statements.
Here’s a quick recap breakdown.
Revenue up top – how much money the company made.
Expenses in the middle – how much the company spent to make the money.
Operating income at the bottom – How much the company kept after spending the money.
Non-operating income (losses) below the line – Other non-core stuff the company made or lost money on.
Net income at the actual very bottom – How much the company profited. Well, “profited” in this case. “Non-Profit” after all. We’ll save that one for another time.
You can now see part of the picture of what is going on at Providence and I hope, not be afraid of income statements anymore.
You can also use the basics to analyze a business further. How much is it spending on goods? Is it an expensive business to run? Does it make high margins or low margins?
More importantly, how do the numbers from this year look compared to last year.
Income statements always include the current year and prior year, if not 2 years prior.
Check it:
You should always look to compare.
And if you really want to see what’s up and have nothing better to do on a Wednesday afternoon, pull the last 5 years of income statements and look at trends.
That’s the breakdown for today.
I hope you found this useful.
Not getting value from this newsletter? Please let me know, so I can improve it!
Loving this sh… stuff? Forward to a friend or colleague!
Want to see a specific topic broken down? Lemme know!
See you out there!
Love,
Preston
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