the-hospital-was-founded-in-1946-by-rob-winslow

Share on facebook
Facebook
Share on google
Google+
Share on twitter
Twitter
Share on linkedin
LinkedIn

Project Analysis Case Study

Boca Grande Hospital

Boca Grande Hospital is a 250-bed, investor-owned hospital
located in Boca Grande, Florida, which is known as the Tarpon Capital of the
World for its fine fishing. The hospital was founded in 1946 by Rob Winslow, a
prominent Florida physician, on his return from service in World War II.
Winslow relinquished control of the hospital in 1967 while it was still small
and in a relatively quiet setting. However, in recent years, the Florida lower
west coast has experienced a population explosion, which has fostered high
economic growth as well as a continuing need for healthcare services. Today,
under a succession of excellent CEOs, Boca Grande Hospital is acknowledged to
be one of the leading healthcare providers in the area.

Boca Grande’s management is currently evaluating a proposed
ambulatory (outpatient) surgery center. (For more information on ambulatory
surgery see the Federated Ambulatory Surgery Association Web site at .fasa.org/”>http://www.fasa.org). Over 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, minor procedures take about one hour or less, and major
procedures take about 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.

The outpatient surgery market has experienced significant
growth since the first ambulatory surgery center opened in 1970. By 1990, about
2.5 million procedures were being performed, but by 2006 the number had grown
to over 6 million. This growth has been fueled primarily by three factors.
First, rapid advances in technology—mainly in laser, laparoscopic, endoscopic,
and arthroscopic technologies—have enabled many procedures historically
performed in inpatient surgical suites to be switched to outpatient settings.
Second, Medicare has been aggressive in approving new minimally invasive surgery
techniques, so the number of Medicare patients utilizing outpatient surgery
services has grown substantially. Finally, patients prefer outpatient surgeries
because they are more convenient, and third-party payers prefer them because
they are less costly. All of these factors have led to a situation in which the
number of inpatient surgeries has remained flat over the last few years while
the number of outpatient procedures has continuously grown at over 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 2,700, so competition in many
areas has become intense. Somewhat surprisingly, there is no outpatient surgery
center in Boca Grande’s immediate service area, though there have been rumors
that local physicians are exploring the feasibility of a physician-owned
facility.

Boca Grande owns a parcel of land adjacent to the hospital
that is a perfect location for the surgery center. It bought the land five
years ago for $150,000, and last year the hospital spent (and expensed for tax
purposes) $25,000 to clear the land, and put in sewer and utility lines. If
sold in today’s market, the land would bring in $200,000, net of all fees,
commissions, and taxes. Land prices have been extremely volatile in the Boca
Grande area, so the hospital’s 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 building, which will house four operating suites, will
cost $5 million and the equipment will cost an additional $5 million, for a
total of $10 million. Assume that both the building and the equipment fall into
the Modified Accelerated Cost Recovery System (MACRS) 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 Boca Grande 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, Boca Grande typically uses the 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 asset’s 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 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 revenue
amount to $1,000 per procedure. The center would be open five days a week, 50
weeks a year, for a total of 250 days a year. Labor costs to run the surgery
center are estimated at $672,000 per year including fringe benefits. Utilities,
including hazardous waste disposal, will add another $50,000 in annual costs.

If the surgery center is built, the hospital’s cash overhead
costs will increase by $36,000 annually, primarily for housekeeping and
buildings and grounds maintenance. In addition, the center will be allocated
$25,000 of Boca Grande’s current $2,800,000 in administrative overhead costs.
On average, each procedure will require $200 in expendable medical supplies,
including anesthetics. Although the hospital’s inventories and receivables will
rise slightly if the center is constructed, its accruals and payables will also
increase. The overall change in net working capital is expected to be small and
hence not material to the analysis. The hospital’s marginal federal-plus-state
tax rate is 40 percent.

One of the most difficult factors to deal with in project
analysis is inflation. 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, Boca Grande 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 meeting of
the hospital’s board of directors, several questions were raised. In
particular, one director wanted to make sure that a complete risk analysis,
including sensitivity and scenario analyses, was performed prior to presenting
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 money loser. They do not want a repeat of that occurrence.

One of Boca Grande’s directors states that the hospital was
putting too much faith in numbers. “After all,” she pointed out,
“that is what got us into trouble with the day care center. We need to
start worrying more about how projects fit into our strategic vision and how
they impact the services that we currently offer.” Another director, who
is also the hospital’s 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 surgery department head, which
indicated that an outpatient surgery center could siphon off up to $1,000,000
in cash revenues annually. When pressed, the department head indicated 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, the hospital’s director of capital budgeting, met with department
heads of surgery, 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 per day could be as low as 10. Conversely, if acceptance is
strong and no competing centers are built, the number of procedures can be as
high as 25 per day, compared to the most likely value of 20.

The average net revenue amount, with an expected value of
$1,000, is a function of the types of procedures performed and the amount of
managed care penetration. If surgery severity remains high (that is, if a
higher number of complicated procedures are performed than anticipated) and
managed care penetration remains low, the average revenue can be as high as
$1,200. Conversely, if the severity is lower than expected and managed care
penetration increases, the average revenue can be as low as $800. Finally, if
real estate and medical equipment values stay strong, the building and
equipment salvage value can be as high as $6 million, but if the market
weakens, the salvage value can be as low as $4 million, compared to an expected
value of $5 million.

Jules also discusses the probabilities of the various
scenarios with the medical and marketing staffs, but after considerable debate
no consensus is reached. To add to the confusion, one member of the medical
staff, who has just returned from a University of Michigan executive program on
financial management, questions the rationale for confining the scenario
analysis to three scenarios. “Why not five or seven?” he queries.
Additionally, he says that the executive program has taught him a good way to
assess the impact of inflation on project profitability, which is to create and
analyze an inflation impact table, such as the one shown in Table 2.

To help with the risk incorporation phase of the analysis,
Jules consults Mark Hauser, Boca Grande’s CFO, about both the risk inherent in
the hospital’s average project and how the hospital typically adjusts for risk.
Mark tells Jules that based on historical scenario analysis data that use
worst, most likely, and best case values, the hospital’s average project has a
coefficient of variation of net present value (NPV) in the range of 0.3 to 0.6
and that the hospital typically adds or subtracts 4 percentage points from its
10 percent corporate cost of capital to adjust for differential project risk.
However, Mark is quick to admit that the risk adjustment factor is arbitrary
and that it can just as easily be 2 percentage points or 6 percentage points.

Assume that Boca Grande has hired you as a financial
consultant. Your task is to conduct a complete project analysis on the
ambulatory surgery center and to present your findings and recommendations to
the hospital’s board of directors.

Optional: This case is well suited for the application of the
Monte Carlo simulation. If you are familiar with this risk assessment
technique, and have access to the appropriate add-in software, apply it to this
case.

Table 1: Boca Grande Hospital: Projected Surgery Center Staffing

Position

Annual salary

Full-time equivalent (FTEs)

Total Salary

Executive director

55,000

1

55,000

Director of nursing

45,000

1

45,000

Accounting clerk

35,000

1

35,000

Collections clerk

30,000

1

30,000

Scheduling clerk

25,000

1

25,000

Registered nurses

40,000

8

320,000

Nursing assistants

15,000

2

30,000

Transcriptionist

20,000

1

20,000

Total

560,000

Plus 20 percent fringe benefit allowance

112,000

Total salaries and benefits

672,000

Table 2: Boca Grande Hospital: Inflation Impact Table

Level of Revenue Inflation

0%

3.0%

6.0%

9.0%

12.0%

Level of Cost Inflation

0%

NPV

NPV

NPV

NPV

NPV

3.0%

NPV

NPV

NPV

NPV

NPV

6.0%

NPV

NPV

NPV

NPV

NPV

9.0%

NPV

NPV

NPV

NPV

NPV

12.0%

NPV

NPV

NPV

NPV

NPV

More to explorer

English, Literature & Philology

One of the central concerns with regard to the structuring of this class has been to demonstrate the ways in which histories

Answer:

Title: the-hospital-was-founded-in-1946-by-rob-winslow

This question has been Solved!

Click the button below to order this solution.

Leave a Reply

Your email address will not be published. Required fields are marked *

Open chat