Read Case 20 (pages 127-132) from Gapenskis Cases in Healthcare Finance ? Coral Bay Hospital.”
Create a presentation in Microsoft PowerPoint (PPT), suitable for presentation to a senior level executive. The final product should include a title slide with your name and the name of the case. Two or three slides per question (see below) should be sufficient to respond appropriately to the case prompts. Slide numbers should be included. Use of non-case related graphics is not required. All Excel work should be imported into the presentation in table format (in the body of the document) or enclosed as an Appendix within the same document. Use of external resources and articles is encouraged, but not required. References should be cited in APA format, either as a footnote on the slide where the information / data is used or in an appendix slide.
In your presentation, provide a response to the following questions from the case study:
What are the NPV, IRR, MIRR, and payback of the proposed ambulatory surgery center?Do the measures indicate acceptance or rejection of the proposed ambulatory surgery center?One board member wants to make sure that a complete risk analysis, including sensitivity and scenario analyses, is performed before the proposal is sent to the board.Perform a sensitivity analysis.What management information is provided by the sensitivity analysis?Perform a scenario analysis.What management information is provided by the scenario analysis?Why is the expected NPV obtained in the scenario analysis different from the base case NPV?A board member is interested in the utilization breakeven of the Center.What are the breakeven values of the three input variables that are highly uncertain?What management information is provided by the breakeven analysis?? Foundation of ACHE, 2018. Reproduction without permission is prohibited.127CASECORAL BAY HOSPITALTRADITIONAL PROJECT ANALYSIS Coral Bay Hospital is a 250-bed, investor-owned hospital located in Coral Bay, Florida, which is known as the Th e Sport Fishing Capital of the World.? Th e hospital was founded in 1946 by Dr. Rob Winslow, a prominent Florida physician, on his return from service in World War II. He relinquished control of Coral Bay in 1967 while it was still small and in a relatively quiet setting. However, in recent years, south Florida has expe-rienced a population explosion, which has fostered high economic growth and the need for more healthcare services. Today, under a succession of excellent CEOs, Coral Bay is recognized as one of the leading healthcare providers in the area.Coral Bays management is currently evaluating a proposed ambulatory (outpatient) surgery center. (For more information on ambulatory surgery, see the Ambulatory Surgery Center Association website at www.ascassocia-tion.org.) More than 80 percent of all outpatient surgery is performed by specialists in gastroenterology, gynecology, ophthalmology, otolaryngology, orthopedics, plastic surgery, and urology. Ambulatory surgery requires an average of about one-and-a-half hours to complete: Minor procedures take about one hour or less, and major procedures typically take two or more hours. About 60 percent of the procedures are performed under general anesthesia, 30 percent under local anesthesia, and 10 percent under regional or spinal anesthesia. In general, operating rooms are built in pairs so that a patient can be prepped in one room while the surgeon is completing a procedure in the other room.Th e outpatient surgery market has experienced signifi cant growth since the fi rst ambulatory surgery center opened in 1970. By 1990, about 2.5 million 20Cases in Healthcare Finance128procedures were being performed at stand-alone outpatient centers, and by 2017, the number had grown to more than 20 million. This growth has been fueled primarily by three factors. First, rapid advancements in technology have enabled many procedures that were historically performed in inpatient surgical suites to be offered at outpatient settings. This shift was caused mainly by advances in laser, laparoscopic, endoscopic, and arthroscopic technologies. Second, Medicare has been aggressive in approving new minimally invasive surgery techniques, so the number of Medicare patients using outpatient surgery services has grown substantially. Third, patients prefer outpatient surgeries because they are more convenient, and third-party payers prefer them because they are less costly.Because of these factors, the number of inpatient surgeries has remained more or less flat over the past 20 years, whereas the number of outpatient procedures has continuously grown more than 10 percent annually. Rapid growth in the number of outpatient surgeries has been accompanied by a corresponding growth in the number of outpatient facilities nationwide. The number currently stands at about 5,300, so competition in many areas has become intense. Somewhat surprisingly, no outpatient surgery center exists in Coral Bays immediate service area, although rumors are that local surgeons are exploring the feasibility of a physician-owned facility.Coral Bay currently owns a parcel of land adjacent to its facility that is a perfect location for the surgery center. The hospital bought the land five years ago for $150,000 and spent (and expensed for tax purposes) $25,000 to clear the land and put in sewer and utility lines last year. If sold in todays market, the land would bring in $200,000, net of all fees, commissions, and taxes. Land prices have been extremely volatile, so Coral Bays standard procedure is to assume a salvage value equal to the current value of the land. Of course, land is not depreciated for either book or tax purposes.The surgery center building, which would house four operating suites, would cost $5 million, and the equipment would cost an additional $5 million, for a total of $10 million. Assume that both the building and the equipment fall into the MACRS (modified accelerated cost recovery system) five-year class for tax-depreciation purposes. (In reality, the building would have to be depreciated over a much longer period than the equipment.) The project will probably have a long life, but Coral Bay typically assumes a five-year life in its capital budgeting analyses and then approximates the value of the cash flows beyond Year 5 by including a terminal, or salvage, value in the analysis. To estimate the salvage value, Coral Bay typically usesCase 20: Coral Bay Hospital129the market value of the building and equipment after five years, which for this project is estimated to be $5 million before taxes, excluding the land value. (Note that taxes must be paid on the difference between an assets salvage value and its tax book value at termination. For example, if an asset that cost $10,000 has been depreciated down to $5,000 and then sold for $7,000, the firm owes taxes on the $2,000 excess in salvage value over tax book value.)The expected volume at the surgery center is 20 procedures a day. The average charge per procedure is expected to be $1,500, but charity care, bad debts, managed care plan discounts, and other allowances lower the net patient revenue amount to $1,000. The surgery center would be open five days a week, 50 weeks a year, for a total of 250 days a year. As detailed in exhibit 20.1, labor costs to run the surgery center are estimated at $918,000 per year, including fringe benefits. Utilities, including hazardous waste dis-posal, would add another $50,000 in annual costs.If the surgery center were built, the hospitals cash overhead costs would increase by $36,000 annually, primarily for housekeeping and buildings and grounds maintenance. In addition, the center would be allocated $25,000 of Coral Bays current $2.8 million in administrative overhead costs. On average, each procedure would require $200 in expendable medical supplies, including anesthetics. Although Coral Bays inventories and receivables would increase slightly if the center is constructed, its accruals and payables would also increase. The overall change in net working capital is expected to be small and hence not material to the analysis. Coral Bays marginal federal-plus-state tax rate is 40 percent.One of the most difficult factors to deal with in project analysis is infla-tion. Both input costs and charges in the healthcare industry have been rising at about twice the rate of overall inflation. Furthermore, inflationary pressures have been highly variable. Because of the difficulties involved in forecasting inflation rates, Coral Bay begins each analysis by assuming that both revenues and costs, except for depreciation, will increase at a constant rate. Under current conditions, this rate is assumed to be 3 percent.When the project was mentioned briefly at the last board of directors meeting, several questions were raised. In particular, one director wanted to make sure that a complete risk analysis, including sensitivity and scenario analyses, was performed before the presentation of the proposal to the board. Recently, the board was forced to close a day care center that appeared to be profitable when analyzed two years ago but turned out to be a big moneyCases in Healthcare Finance130loser. The board does not want a repeat of that occurrence. One of the direc-tors stated that she thought Coral Bay was putting too much faith in the numbers. After all,? she pointed out, that is what got us into trouble on the day care center. We need to start worrying more about how projects fit into our strategic vision and how they affect the services we currently offer.?Another director, who is also Coral Bays chief of medicine, expressed concern over the impact of the ambulatory surgery center on the current volume of inpatient surgeries. This concern prompted an analysis by the head of the surgery department, who reported that an outpatient surgery center could siphon off up to $1 million in cash revenues annually. When pressed, the department head estimated that such a reduction in volume could also lead to a $500,000 reduction in annual cash expenses.To develop the data needed for the risk analysis, Jules Bergman, Coral Bays director of capital budgeting, met with the department heads of sur-gery, marketing, and facilities. After several sessions, they concluded that three input variables are highly uncertain: number of procedures per day, average revenue per procedure, and building and equipment salvage value. If another entity enters the local ambulatory surgery market, the number of procedures could be as low as ten per day. Conversely, if acceptance is strong and no competing surgery centers are built, the number of procedures could be as high as 25 per day, compared with the most likely value of 20 per day.The expected average net patient revenue of $1,000 is a function of the types of procedures performed and the amount of managed care penetra-tion. If surgery severity were high (i.e., if a higher number of complicated procedures than anticipated were performed) and managed care penetra-tion remained low, then the average revenue could be as high as $1,200. Conversely, if the severity were lower than expected and managed care penetration increases, the average revenue could be as low as $800. Finally, if real estate and medical equipment values stay strong, the building and equipment salvage value could be as high as $6 million, but if the market weakens, the salvage value could be as low as $4 million, compared with an expected value of $5 million.Jules also discussed the probabilities of the various scenarios with the medical and marketing staffs, but after considerable debate no consensus could be reached. To add to the confusion, one member of the medical staff, who had just returned from a University of Michigan executive program on financial management, questioned why the scenario analysis had to be confined to just three scenarios. Why not five or seven?? he queried. InCase 20: Coral Bay Hospital131addition, the current cost of capital includes an expected inflation estimate of 2 percent that will be used to make a decision today, but future inflation is uncertain and could affect cash flows in the future. Jules said that a good way to assess the impact of uncertain, future inflation on project profitability is to create a table such as the one shown in exhibit 20.2.To help with the risk incorporation phase of the analysis, Jules consulted with Mark Hauser, Coral Bays chief financial officer, about both the risk inherent in the hospitals average project and how the hospital typically adjusts for risk. Mark told Jules that, on the basis of historical scenario analysis data that use worst, most likely, and best case values, the average project has a coefficient of variation of net present value in the range of 1.0 to 2.0 and that 4 percentage points are typically added or subtracted to the 9 percent corporate cost of capital to adjust for differential project risk.Coral Bay has hired you as a financial consultant. Your task is to conduct a complete project analysis on the ambulatory surgery center and then pres-ent your findings and recommendations to the board of directors.EXHIBIT 20.1 Coral Bay Hospital: Projected Surgery Center Staffing RequirementsPosition Annual Salary FTEs Total SalaryExecutive director $60,000 1 $ 60,000Director of nursing 50,000 1 50,000Accounting clerk 35,000 1 35,000Collections clerk 30,000 1 30,000Scheduling clerk 25,000 1 25,000Registered nurses 60,000 8 480,000Nursing assistants 30,000 2 60,000Transcriptionist 25,000 1 25,000 Total $765,000Plus 20 percent fringe-benefit allowance 153,000Total salaries and benefits $918,000FTE: full-time equivalentCases in Healthcare Finance132EXHIBIT 20.2 Impact of Uncertain Future Inflation on NPV of Proposed Ambulatory Surgery Center 0% 1% 2% 3% 4% 5% 6% 0% NPV NPV NPV NPV NPV NPV NPV 1% NPV NPV NPV NPV NPV NPV NPV 2% NPV NPV NPV NPV NPV NPV NPV 3% NPV NPV NPV NPV NPV NPV NPV 4% NPV NPV NPV NPV NPV NPV NPV 5% NPV NPV NPV NPV NPV NPV NPV 6% NPV NPV NPV NPV NPV NPV NPVNPV: net present valueLevel of Cost InflationLevel of Net Patient Revenue Inflation
essaysresearch.org Plagiarism Free Papers
Are you looking for custom essay writing service or even dissertation writing services? Just request for our write my paper service, and we\’ll match you with the best essay writer in your subject! With an exceptional team of professional academic experts in a wide range of subjects, we can guarantee you an unrivaled quality of custom-written papers.
Why Hire essaysresearch.org writers to do your paper?
Quality- We are experienced and have access to ample research materials.
We write plagiarism Free Content
Confidential- We never share or sell your personal information to third parties.
Support-Chat with us today! We are always waiting to answer all your questions.
Read Case 20 (pages 127-132) from Gapenskis Cases in Healthcare Finance ? Coral Bay Hospital.”