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