PALMS HOSPITAL TRADITIONAL PROJECT ANALYSIS HCA 515 Fall 2014 Chetan Gujarathi Nihal Kabre Maria...
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Transcript of PALMS HOSPITAL TRADITIONAL PROJECT ANALYSIS HCA 515 Fall 2014 Chetan Gujarathi Nihal Kabre Maria...
PALMS HOSPITALTRADITIONAL PROJECT ANALYSIS
HCA 515Fall 2014
Chetan GujarathiNihal Kabre
Maria KhalidKrupali Joshi
Marie-Dianne Sauco
PALMS HOSPITAL CASE
250 bed, investor owned hospital located in Islamorada, Florida.
Founded in 1946 by Rob Winslow a prominent Florida physician.
Palms Hospital Management considering expansion into an outpatient surgery center - first mover advantage.
Project risk analysis conducted: To avoid past failures To forecast inflation rates of healthcare industry, forecast costs and revenues
PALMS HOSPITAL CASE
ASC Procedures
Source: Ambulatory Surgery Center Association
BACKGROUND OF ASC
PPACA - Strategic planning and financial management necessary for healthcare organizations to maintain stability
Ambulatory Surgery Centers - Rise in trend and revenue
ASC - Mostly physician owned , hospital owned with quality of care and cost savings
BACKGROUND OF ASC
Medicare Reimbursements - 58% of the amount paid to the hospitals for the same procedure
CMS - strict quality regulations
Main issues - Reimbursement, EMR implementation, Physician alignment, healthcare reform and consolidation
AMBULATORY SURGERY CENTERS
First opened in 1970 2.5 million procedures in 1990 Have grown to 20 million by 2009 Medicare approval on new minimally invasive surgery
techniques. Patient preferences Third party payers preference due to cost Rapid advancements in technology
Laser, Laparoscopic, Endoscopic and Arthroscopic
EXHIBIT 1 Ownership
Structure of ASCs
Source: Ambulatory Surgery Center Association.
EXHIBIT 2 Comparison of ASC
and Hospital Outpatient Department (HOPD) Payment Rate.
Source: Ambulatory Surgery Center Association
SPECIFIC CASE ISSUES
Volatility of input variables: Number of procedures per day Average revenue per procedure Salvage value of building and equipment
Inflation: highly variable
Opportunity cost – loss of inpatient surgeries if outpatient surgery center is built. $1 million lost annual cash $500, 000 annual cash expenses Net = $500,000 revenue/ opportunity cost.
ANALYTICAL TOOLS AND METHODS
Capital Budgeting Analysis
• Cash Flow Estimation
• Risk Assessment
• Project’s Cost of Capital
Return on Investment Analysis
• NPV
• IRR
• MIRR
Break-even Analysis• Using Excel’s Goal Seek
Function
Sensitivity Analysis
Scenario Analysis
RESULTSSENSITIVITY ANALYSIS
-120% -100% -80% -60% -40% -20% 0% 20% 40% 60% 80%
-5000
-4000
-3000
-2000
-1000
0
1000
2000
3000
4000
# of ProceduresAvg Revenue Per ProcedureBuilding/Equipment Salvage Value
RESULTSRETURN ON INVESTMENT
Year 0 1 2 3 4 5
Net Cash Flow
($10,200,000)
$2,297,600 $2,822,528 $2,348,804 $2,116,468 $5,555,562
ROI Measure Value
Net present value (NPV) $881,229
Internal rate of return (IRR) 12.9%
Modified IRR (MIRR) 11.8%
Payback 4.1
RESULTSBREAK-EVEN ANALYSIS
Variable Break-Even Value
Number of Procedures
18
Average Revenue per Procedure
$927
Building Equipment Salvage Value
$2,634,619
RESULTSSCENARIO ANALYSIS
Case Probabilit
yNumber of Procedure
s
Average Revenue
per Procedure
Building/Equip
Salvage Value NPV
Worst 20.0% 10 $800 $4,000,000 ($5,495,223.84)
Most Likely 60.0% 20 1,000 5,000,000 $881,229.13
Best 20.0% 25 1,200 6,000,000 $6,284,739.28
Total 100.0%
Expected NPV$686,640.56
Standard Deviation $3,732,767
Coefficient of Variation 5.4
SCENARIO ANALYSISContd.
($8,000)
($6,000)
($4,000)
($2,000)
$0
$2,000
$4,000
$6,000
$8,000
($5,495)
$881
$6,284
NPV (in thousands of dollars)
NPV
Best CaseMost Likely
Worst Case
RESULTSHIGH RISK PROJECT HIGH COST OF CAPITAL
Variable Value
Cost of Capital 14%
NPV ($288,838)
IRR (12.9%)
DISCUSSION & LIMITATIONS Attractive investment :
Reimbursement rates equal to those of hospital Revenue per procedure being influential factor.
Limited information : Of hospital’s current cash flow Inflation rate prediction
Sensitivity analysis: limited Only considers uncertain variable separately and not interactions
among the input variable Less information of the current cash flow and past failures
Scenario analysis: limited Only 3 possible scenarios when there could be many possibilities Assumes definite relationship among variables combined to form
best and worst case scenario
SUGGESTIONS Scenario analysis reveals a negative NPV and CV much greater
than the hospital’s average project’s CV we have to consider the expected NPV that considers all these changes at a higher cost of capital of 14%.
If the management is willing to take the risk then they will go forward with the investment, but if they are risk averse they will not make the investment.
With the recent history of failure of the Day Care project, the board may be highly cautious before making further investments.
The local surgeons are considering physician owned facilities, therefore there is likely to be competition in the future.
CONCLUSION
Due to high risk and low profitability, it is suggested that the board should NOT go ahead with the investment
REFERENCES
Ambulatory Surgery Center Association (2014). Retrieved from
http://www.ascassociation.org/home
Gapenski, L., & Pink, G. (2009). Palms Hospital: Traditional Project Analysis. In Cases in Health Care finance (pp. 143-148). Health Administration Press; Fourth Edition.
Gapenski, L.C. & Pink, G.H. (2011). Understanding Healthcare Financial Management. Chicago, IL: Health Administration Press
(n.d.). Ambulatory Surgery Centers: A Positive Trend in Health Care. Retrieved from Ambulatory Surgery Center Association website: https://higherlogicdownload.s3.amazonaws.com/ASCACONNECT/142533d1-73af-4211-9238-7f136c02de93/UploadedImages/About%20Us/ASCs%20-%20A%20Positive%20Trend%20in%20Health%20Care.pdf
Pallardy, C., & Becker, S. (2013, July 30). 50 things to know about the ambulatory surgery center industry. Retrieved from Becker's ASC Review website: http://www.beckersasc.com/lists/50-things-to-know-about-the-ambulatory-surgery-center-industry.html