The Healthcare Breakdown No. 002 - Breaking down all this other ish on Ascension'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: The income statement (but more this time)

What you’ll learn: All those other numbers and how they impact performance

Why it matters: Know what drives profit or losses in a business

Read time: 5 minutes

Last time we broke down the income statement from a high level and went into some detail about specific categories, highlighting 3 big numbers:

1. Revenue

2. Operating expenses

3. Operating income

We also touched on Net income and non-operating expenses.

Today, we are going to dive a little deeper into the details of:

1. Interest expense

2. Depreciation

3. Amortization

4. Other (yes, there’s always a black box “Other”)

5. Nonrecurring gains (losses)

6. Investment return

7. Noncontrolling interest

And because this is the real world, here’s Ascension’s income statement from 2022/2021 so you can see what these items look like:

First up, Interest Expense

Businesses take out debt all the time. You know to pay for stuff that they can’t afford, like those Air Jordan’s you want. Hospital’s debt is usually in the form of Bonds.

Bonds are probably the most boring topic in finance. Well, that’s actually not true, Activity based cost accounting is. But never mind.

A bond is debt. Think of it like a loan from the bank. Except that instead of borrowing money from the bank, you borrow money from investors. They expect interest on the bonds, just like any other debt.

Cool, now that you have an extra piece of information you weren’t interested in, back to the task at hand, interest expense.

This is just the interest the company owes and pays for the debt it’s taken on. Like the shitty part of your mortgage.

Next, Depreciation

Depreciation confounds a lot of people. I am constantly confounded as well, so you’re not alone.

It’s the loss in value of a physical thing over time.

Think of your car. In ten years it’s going to be a piece of junk because you drive too fast, break too hard, and never get your oil changed on time.

Wait, that’s my car.

Nonetheless, certain physical assets depreciate over time in the same way. Old buildings, equipment, linoleum, etc.

The reason it’s an expense is because you pay for it upfront in order to enable the delivery of your product of service. Based on accounting principles we match costs with delivery of goods and services on income statement. Because these assets helped to deliver goods and services, we depreciate the asset as an expense tied to the delivery.

Warren Buffet, fun fact, hates that people take depreciation out of Net Income to arrive at EBITDA. You should look it up, he gets awfully riled by it.

The reason is because you pay for something up front to realize its value. He much prefers realizing something’s value and then paying for it.

Like insurance.

Ooops, landmine.

Next!

Amortization

Depreciation’s step-brother. Like the ending of your favorite Hallmark movie, they become so close, they often appear on the same line.

Amortization is like depreciation but for intangible assets, like patents, trademarks, or copyrights. Stuff you can’t kick if you’re frustrated.

Amortization is also used in paying down debt. If a business is paying down a loan, this is where that expense would go.

And that’s all I have to say about that.

Other (yes, there’s always a black box “Other”)

Ya, I don’t know what this is either. You can sometimes find info on what this bucket is comprised of in the notes of the financials. Sometimes not. It’s really just a whole lot of other… stuff.

What could Ascension possibly have spent $2.9B on to shove in this category? I don’t know… gift shops and Panera can be expensive to maintain.

Seriously though, there are a ton of small categories that add up to a fairly large number in “Other,” like utilities and lease payments. And Panera.

Nonrecurring gains (losses)

This is always an interesting category because it’s left up to the determination of management to categorize gains or losses here.

In essence these are gains or losses that you wouldn’t expect to see happen again. Like a natural disaster, an insurance payment, hush money, or something that is outside the scope of normal business.

Anytime you see expenses, gains, or losses below Operating Income, it’s because management wants to call it out as non-material to operations.

It’s wise to peruse the notes section to get a handle on these nonrecurring gains (losses), because sometimes, they are a little more important than some would have you believe.

In this case, Ascension’s copy and past skills are so strong, as it decided to copy and paste grainy images of its numbers in the annual filing, making it none too searchable. Got to hand it to the ctrl+v wizard behind this one. He just said, f-it, I’m not rewriting this, I’m just going to copy and paste it. We used up all the budget on Panera.

I digress…

More learning…

Investment return

This is my favorite section and is important to understand. Here’s the breakdown sub-breakdown:

Non-profits that receive large donations, have endowments, or generate significant cash, invest these funds. They do so to generate returns from their cash or funds.

What’s interesting is how these gains and losses are reported. Through no fault of their own, the accounting rules dictate that non-profits record realized and unrealized gains (losses) on their income statement. They do so, again, because it’s considered normal business for non-profits to invest funds.

Side bar.. realized gains/losses mean you actually lost or gained money on an investment.

Unrealized gains/losses means an investment went up or down, but you didn’t sell it.

Side bar concluded.

However, taking an unrealized loss can really throw things off.

How, you might ask?

Well, consider a large, multi-state health system that generated $1.7B in cash from operations but all the headlines you read only mention the $1.8B in losses driven by the $1.2B in losses from investments. Consider further that $1.6B of the returns were unrealized.

One more bonus layer, these investments are in things like hedge funds, private equity, private real-estate, and all kinds of other really fun stuff.

It pays to scrutinize this section, especially when you see extremely high reported losses from large health systems.

And finally… drumroll….Noncontrolling interest!

Yay! Wohoo!!! Mimosa time in 4 more paragraphs!

This below the line expense comes from gains or losses of another company in which the current company has ownership in. Blech.

This is where you report income from a company you have ownership in of less then 50%. Yes, better.

If a company owns 51% or more, it reports that company’s revenue as its own. If it’s less, then it becomes noncontrolling interest and goes way down at the end.

Boom shaka, easy.

Well, there you have it. The other stuff you’ll see on an income statement that will no longer leave your scratching your head. Or your eyes out depending on how much you hate finance.

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 topic broken down? Lemme know!

See you out there!

Love,

Preston

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