To: Charles Redman, CEO

From: William Castor

Re: Old Dominion Health Plans Financial Analysis

Date: February 1, 2007

At your request, I have completed a brief financial statement and operating indicator analysis of Old Dominion Health Plans. My analysis, which is included below will not only discuss the state of the organization, but also the strengths and weaknesses at Old Dominion Health Plans.

Statement of Cash Flows

According to the Statement of Cash Flows, the organization has a positive cash flow from operations in the amount of $27.8 million during the last year. In addition, there is a negative cash flow from investing and financing in the amounts of $6.7 million and $31.1 million, respectively. However, the organization still has an overall positive total cash flow in the amount of $27.2 million. This amount is $10 million lower than last fiscal year. This is not much of a concern at this time, as the $10 million was used to pay down long-term debt.

Overview of Old Dominion’s Financial Position

One of the best measures of the organization’s financial position is the DuPont Analysis.There are three factors that are measured in the DuPont Anaylsis: Return on Assets (ROA), Return on Equity (ROE), and the equity multiplier. According to the analysis, the ROA increased from 10.21 percent in 2004 to 16.27 percent in 2005. Not only has the ROA increased, it remains higher than the industry average of 8.99 percent. This is good for the organization as it shows that the organization is able to generate a higher return n the company’s investments and assets.

The DuPont Analysis also shows us that the ROE increased from 31.96 percent in 2004 to 36.32 percent in 2005. In addition, this amount remains above the industry average of 28.41 percent. This is advantageous because it shows that the organization is able to generate a higher than average profit with the money that the shareholders have invested.

The last part of the DuPont Analysis is the equity multiplier. According to the data, the equity multiplier has decreased from 3.13 in 2004 to 2.23 in 2005. This decreased amount is now below the industry average of 3.16. This is a good sign because it shows that the organization is relying less on debt to finance its asset base.

Ratio Analysis

The profitability ratios (total margin and operating margin) have both increased from 2004 to 2005. Both ratios are now above the industry average. However, both ratios are not in the upper quartile. This tells us that about 25 percent of the industry has higher profitability ratios.

The analysis of the current ratio shows no change from 2004 to 2005. In addition, the current ratio is currently above average and is in the upper quartile. This means that the organization is the upper 25 percent of all companies in the industry in being able to convert current assets into cash.

The debt ratio has decreased from 2004 to 2005 by 18 percent. This decrease now has the organization in the lower quartile compared to the rest of the industry. Thisshows that the organization should be better equipped to take on debt, if needed.

The total asset turnover has remained the same from 2004 to 2005. The ratio is slightly below the industry average. As a result, the organization may have some difficulty generating revenue from its assets when compared to other managed care companies.

Also, the days premium receivable has increased by 76 percent. While the ratio is still below average, the large increase over the past year should be of concern in the future.

Overall, Old Dominion is doing rather well when analyzing the financial ratios. For example, Old Dominion is profitable, liquid, and is well equipped to handle any debt that may need to be secured in the future. Of concern is the fast rising days premium receivable. This ratio shows us that there may be some difficulty in the future collecting premiums.

When performing a ratio analysis, it is important to note that some ratios that apply to managed care companies may not be as important when analyzing other medical facilities, such as hospitals. For example, days premium receivable is very important to the managed care industry, but would not be used by a hospital. However, ratios such as return on assets would be more important to a hospital as they are more capital intensive than a managed care company.

Operating Data Analysis

The operating ratios show that Old Dominion has low administrative costs compared to the industry average and its competitors. This shows us that Old Dominion has low administrative costs. In contrast, Old Dominion is higher than average and most competitors regarding expenses. This could be of concern because utilization and reimbursement rates may be growing at too fast of a rate. However, the high expenses may also be the result of providing better than average services than its competitors.

The analysis of the revenue indicators shows that their Commercial Premium Revenue PMPM and Medicare Revenue PMPM are higher than the average and any other competitors. This shows us that Old Dominion is either charging too much for their premiums and needs to lower its premiums, or is charging an appropriate amount for their higher quality services, and needs to lower its premiums.

The analysis of the utilization indicators show that Old Dominion enrollees have the highest utilization rates of any of their competitors. This tells us that the enrollees have a higher tendency to use medical services than enrollees who are members of other competing managed care organizations (MCO).

While performing the operating data analysis, it is important to note that many of the above indicators such as, administrative costs ratios, medical lost ratio, commercial premium revenue PMPM, and Medicare revenue PMPM. In comparison, these pieces of data have very little value to a hospital.

Evaluation of Old Dominion’s Financial Condition

According to the analyses performed above, there are several factors that show the strengths of Old Dominion. For example, the profitability ratio analysis shows us that the company is profitable. Next, the liquidity ratios show us that they are liquid, and could convert assets to cash, if needed. Also, the company has a low debt ratio, which is advantageous because Old Dominion may have less trouble securing debt in the future. Lastly, the operating analysis shows us that Old Dominion has low administrative costs but higher premiums.

On the other hand, there are some weaknesses based on the above analyses. For example, Old Dominion has a slightly lower than average total asset turnover. In addition, Old Dominion’s enrollees have a very high utilization rate and high medical costs.

Recommendations

In order to do a better analysis in the future, it would be beneficial to have previous Statements of Cash Flows. This would be beneficial because we could see if the $10 million decrease in cash during the last fiscal year is a one year occurrence, or a sign of a long-term trend. In addition, there are several importance pieces of data missing which make comparing across competitors difficult, such as the Medicare PMPM data for Sparta, Signet Healthcare, and Proxima. If the data was available, we would have a better understanding of how Old Dominion compares to its main competitors across all categories.

As far as future recommendations for the company, I would suggest the following. To begin, I would keep a close look at the rapidly rising rate of days premium receivable. While it is still in an acceptable range, it could easily rise to an unacceptable range, if not closely followed. In addition, I would work on trying to provide incentives to decrease the very high utilization rates. Because the utilization rates are so high, medical costs increase, which leads to high premium rates. If premium rates continue to be so high, Old Dominion could lose business to its main competitors, who may be able to offer customers a lower premium rate.