The Healthcare Breakdown No. 004 - Breaking down Ascension's $1.8B loss? Or wait, gain?
The Healthcare Breakdown
Breaking down topics in business, so you can take back the business of healthcare
What we’re breaking down: Cash Flowwwwwwwwww (all those w’s are the flow).
What you’ll learn: What it is and why it’s totally different than income statement numbers.
Why it matters: Revenue doesn’t pay the bills, cash does. Cash is king after all.
Read time: 7 minutes, maybe more. Who knows?
Ascension made all the headlines when it closed its year back in June 2022. It was the harbinger of a dismal year for health systems. 2022 would be the worst year for hospitals in who knows how long.
Probably like 2 years or something.
Ascension proved it with a reported $1,843,746,000 LOSS. Almost two billion dollars. Poof, gone. Bye, bye new yacht.
Every article was the same.
But there was something else. Something only 2 pages down in its filing.
The statement of cash flow was showing a GAIN in cash from operations. A gain of $1.76B.
How ON EARTH can a health system lose $1.8B and simultaneously make $1.8B?
Well, let’s break this m-f’er dowwwwwwn (flow).
As you know, since you are an avid reader of this newsletter, the income statement is basically comprised of revenue, expenses, and then shows how much is left over.
What you may not know is that in accounting land, just because you have revenue, doesn’t mean you have actual cold hard greenbacks.
Greenbacks is still a thing, right? No?
Ya ain’t got the money. Yet.
Here’s how it works in a simple example.
I go to the hospital for a routine nose job. My Beverly Hills surgeon does an excellent job. I’m happy. My wife is happy. My modeling agent is happy.
Now that: (a) the service has been performed; (b) there is contract (my insurance, which covered the procedure since I only got it for deviated septum, obvs.); and (c) there is reasonable expectation to be paid, the hospital recognizes the revenue.
But as you probably know, insurance companies don’t pay the same day. They pay when they damn well please.
The time difference in recognizing revenue (when the procedure was done) and when the hospital is paid, is the key to cash flow.
Income statements are all about recognized revenue.
Cash flow statements are all about actual cash coming into or going out of an organization.
I’ll give you a non-hospital example.
You start selling eggs because raising chickens is the cool thing to do and eggs are wildly expensive.
You tell Rhonda at the office that you sell these urban farm fresh gems and she wants in. But she doesn’t have $4 on her.
You say it’s no problem, she can just bring it to work tomorrow and hand over the eggs.
When you give her the eggs, you made a sale. That revenue goes onto your income statement.
But since you haven’t collected the money, that IOU goes on your balance sheet as an asset, known as an Account Receivable.
And guess what? That cash shows up as a decrease in your cash on your cash flow statement.
The masters of finance will start talking about accrual based accounting and cash based.
They are both relevant. But, not super relevant to this brief breakdown. Just know that there are differences, but the important key is actual movement of real money and timing.
Side bar concluded…Resuming amazing breakdown.
You may be thinking to yourself right now, well ok, so then Ascension’s cash flow should look worse right? It made all this revenue and it wouldn’t show up on the cash flow statement, so how did it make 1.7 freaking billion dollars??
Well, you may recall that on its income statement, Ascension reported a $879M loss from operations. This number doesn’t include a lot of non-cash and below the line expenses.
So, we already know we will be adding about a billion dollars back to arrive at cash from operations based on this number alone.
The other part, or many parts, is there are a lot of non-cash items or where cash items that had nothing to do with operations.
Here’s a couple relevant ones:
Accounts payable increases. That means the company pays bills later so it holds onto more cash.
Accounts receivable increases. That means more people owe the company money, like Rhonda owes you for the eggs. It also means you get less cash.
Depreciation. Not a cash expense, so it’s added back.
Unrealized losses on investments. No cash movement, added back.
It’s also important to remember that anything in parentheses is subtracted and anything not, is added.
As for the rest of the line items, these are increases and decreases in cash based on different activities. It can get a little confusing, but as long as you keep in mind that this is about movement of actual cash, in and out of a company, it should help keep it straight.
Prepare for detailed, very busy image straight out of your worst accounting text book nightmare chasing you down the hall:
Because you’re smarter than a 5th Grader, (man that was a terrible show) you will have noticed our starting point was more than $1.8B. It was $2.1B. This is because Ascension starts from a Net Change in Assets, which just adds/subtracts some additional other income and expenses.
You will have also noticed some big-ticket items in there. The biggest were:
Depreciation expense: +$1.3B;
Unrealized investment losses: +$2.7B
Long-term investments losses: +$2.3B
There was also a large cash deduction of ($1.3B) in Medicare payments. These were part of the advanced payments that many health systems were given during the first 2 years of the covid-19 pandemic. In this instance it’s not that cash was paid out, but rather it deducts for cash it would have normally received but did not.
You can start to see how important it is to look beyond the income statement. To see the real cash moving in and out of the business.
The statement of cash flow gives a critical look into how an organization manages its cash.
Why does this matter other than as a fun fact or call out large health systems that aren’t actually losing money?
Well, let’s say you want to start a company. You have a killer idea and think that you can close 10 new customers in the first quarter.
That’s super awesome and no doubt you will put together a pro forma that will show your profit in the first quarter. But that profit means nothing to your bank account.
The reason is because your profit isn’t cash in the bank. You see, those customers you closed demanded 60-day terms. And 7 of them weren’t closed until March. So while your Q1 looks strong, you actually don’t make any money until May.
That’s where it really matters and why seeing the connection between the cash flow and the income statement is critical.
It’s also why I never take an income statement at face value. It’s a roll up of way too much with little foundation in the timing of actual payments.
To round this ramble out, Ascension lost $1.8B on paper.
Most of it was depreciation and unrealized investment losses.
In reality, Ascension gained $1.76B in cash in 2022.
Not too shabby for the worst year for hospitals ever… since last year that is. And until next year. Clearly.
That’s the breakdown for today.
I hope you found this useful.
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