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

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 andinvestor-owned facilities operate. The sources of capital availableto the not-for-profits include charitable contributions and debtofferings—unless they are governmental, in which case, higher taxesare also an alternative. Debt availability is always, in part, afunction of performance, and just as failures have arisen in bothsectors, about one-third of the investor-owned hospitals have beendescribed as losing money. Of interest is how can one effectivelyevaluate such an industry, with this type of diversity inorganizational forms and capital availability? A necessaryprerequisite to such an evaluation is to have a firm understandingof how charitable contributions are presented.

St. Jude Children’s Research Hospital/ALSAC has the mission offinding cures for children with catastrophic diseases throughresearch and treatment. For the fiscal year 1999, this entityreported total assets of $221,664,232 and income of $177,071,890. AWeb site at http://www.stjude.org, as well as Guidestar’s listing,references a Form 990 (Return of Organization Exempt from IncomeTax) filing, availability of audited financial statements uponrequest, and information that the hospital has 2,100 employees and350 volunteers. Founded in 1962, the organization seeks funds fromcontributions and grants for unrestricted operating expenses,specific projects, buildings, and endowments. More than 4,000patients are seen annually, with a hospital maintaining 56 beds.The Form 990, Part III states that the hospital provided 15,231inpatient days of care during the fiscal year and patients made40,982 clinic visits. ALSAC is the American Lebanese SyrianAssociated Charities, Inc., the fund-raising arm of St. JudeChildren’s Research Hospital. It reported 1999 total assets of$1,007,699,320 and income of $274,123,399. This organizationreports the number of employees as 565 and the number of volunteersas 800,000. With its sole focus on the hospital, ALSAC’sself-description explains that no child has ever been turned awaydue to an inability to pay for treatment and explains keyaccomplishments in the research area achieved by St. Jude’sresearch and treatment of children with catastrophic diseases. Whatis borne out by the example of St. Jude is the fact that a reviewof the Form 990 filed for the fiscal year ending 6/30/99 indicatesin Part VI the names of related organizations: ALSAC and St. JudeHospital Foundation, both of which are tax exempt. To gain a senseof capital availability to a not-for-profit entity, affiliatedentities must be considered. In addition, the role of volunteers isa source of human capital not effectively captured within theframework of financial statements for not-for-profits, as reflectedin the Form 990 for the fiscal year ending 6/30/99 for ALSAC, whichstates in Part VI:

Unpaid volunteers have made significant contributions of theirtime, principally in fund-raising activities. The value of theseservices is not recognized in the financial statements since it isnot susceptible to an objective measurement or valuation andbecause the activities of these volunteers are not subject to theoperating supervision and control present in an employer/employeerelationship.

Hence, as one evaluates capital sources and uses bynot-for-profits, care is needed to consider affiliatedorganizations’ role, total contributions, and the effect ofvolunteerism on the comparability between not-for-profit andinvestor-owned operations.

Universal Health Services, Inc. filed its 10-K on March 28,2001, for the calendar year 2000, which includes comparativeinformation for 1999. Analysts have described the company as themost aggressive company in the industry over the 1999–2001 timeframe in making acquisitions, particularly of not-for-profitoperations and investor-owned operations experiencing losses. Thecompany is praised for it high operating leverage, the relativelysmall number of shareholders relative to the magnitude of totalrevenue, and stock price as a multiple of earnings. The companyoperates 59 hospitals and, as of 1999, had an average number oflicensed beds of 4,806 at acute care hospitals and 1,976 atbehavioral health centers, with patient days of 963,842 and444,632, respectively. Of interest is a commentary on thecompetition found in the company’s filing:

Competition

In all geographical areas in which the Company operates, thereare other hospitals which provide services comparable to thoseoffered by the Company’s hospitals, some of which are owned bygovernmental agencies and supported by tax revenues, and others ofwhich are owned by nonprofit corporations and may be supported to alarge extent by endowments and charitable contributions. Suchsupport is not available to the Company’s hospitals. Certain of theCompany’s competitors have greater financial resources, are betterequipped and offer a broader range of services than the Company.Outpatient treatment and diagnostic facilities, outpatient surgicalcenters and freestanding ambulatory surgical centers also impactthe healthcare marketplace. In recent years, competition amonghealthcare providers for patients has intensified as hospitaloccupancy rates in the United States have declined due to, amongother things, regulatory and technological changes, increasing useof managed care payment systems, cost containment pressures, ashift toward outpatient treatment and an increasing supply ofphysicians. The Company’s strategies are designed, and managementbelieves that its facilities are positioned, to be competitiveunder these changing circumstances. (Source: 10-K filed3/28/2001)

Financial information is provided in Tables 5.3-1 and 5.3-2 forboth the not-for-profit and the investor-owned hospitals.

Table 5.3-1: Financial Comparisons of the Not-for-ProfitEntities

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
Program service expenses: Education and training	5,471,186
Program service expenses: Medical Services	93,735,602
Reconciliation of revenue, gains, and other support to auditednumbers: 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
Schedule of deferred debits & credits by contract (FAS 116adjustment noted to result in this deferred revenue)	157,628

* The GuideStar.org Web site (http://www.guidestar.org) providesaccess to Forms 990 in .PDF format.

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

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
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 statementinformation for 2000 and 1999.

Requirement A: Recording Revenue

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

2. How are contributions recorded? Is there a distinctionbetween pledges receivable and accounts receivable?

3. Are there circumstances when financial statements canquantify volunteers’ services?

4. Can financial statement users of not-for-profit hospitals’financial statements expect to be fully informed regardingaffiliated parties, such as the linkages between St. JudeChildren’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 themix 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
N/A-Not available (Source: 10-K filed 3/28/2001)
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
Other Sources	21.7%	22.4%	27.2%	30.8%	49.1%
Total	100%	100%	100%	100%	100%

1. How does this revenue mix compare with the revenue blend ofthe not-for-profit entity, St. Jude Children’s Research Hospital(ALSAC)? Access the latest SEC filing and compare the reportedrevenue mix; has it changed?

2. What does that imply as to the strategies of investor-ownedhospitals in managing risk and ensuring adequate capital relativeto not-for-profit entities? An opportunity exists to explore thegreater social and political questions that are frequently debatedabout the compatibility of profit-oriented entities and quality ofhealth care, relative to not-for-profit entities. As background,identify what the latest SEC filings report concerning charitycare.

How would your answers to Requirements A and B differ if thegovernment owned and operated the hospital?