QUESTION
Based on your proposed organization and structure for the GAH and the Community Clinic, we will now focus on financing and budgeting issues.In order to do so, we will need to define the following requirements and assumptions: Cost of facility construction, initial medical equipment, and instrumentation, will not be calculated – as they will be fully paid by the state as a grant. All senior patients will be above the age of 65, and will have only the Federal Medicare health insurance. Research the major constructs of Medicare health coverage as defined by the “Medicare Prospective Payment System.” The hospital and clinic will be financially balanced, that is, income from Medicare payments will cover in full all operating costs. “Medicare Prospective Payment System” The hospital is reimbursed by the government per procedure and/or treatment by a predefined sum and not by the actual expenses performed for and on a particular patient. For example – a patient requiring open heart surgery will utilize the services of physicians, nurses, OR, laboratory, pharmacy, and occupies a hospital bed on average for six days. If a certain patient is discharged after four days, the hospital will still be paid the six-day amount. Hence, the incentive to operate efficiently and effectively, enabling the hospital to “save money.” Based on the services you have decided to provide – at least six, complete the table (GAH Project): Input services/treatments in column A. Input estimated and rounded Medicare reimbursement to GAH (in thousands of dollars) for each treatment in column B (assign for each a figure between $10,000 to $60,000). Your instructor has inputted the projected number of procedures/treatments performed annually at GAH in column C. Calculate the total income for GAH by multiplying columns B*C in column D. Your instructor has inputted the GAH Projected Performance percentage, relative to the Federal standard (100%) in column E. Calculate the total GAH gain or loss by D-(D*E) in column F. Assume a $250,000 annual miscellaneous expense. Prepare (based on the table), a forecast of profit or loss for GAH for the first year of operation. Conclusions and Recommendations.
In order to do so, we will need to define the following requirements and assumptions:
Cost of facility construction, initial medical equipment, and instrumentation, will not be calculated – as they will be fully paid by the state as a grant.
All senior patients will be above the age of 65, and will have only the Federal Medicare health insurance. Research the major constructs of Medicare health coverage as defined by the “Medicare Prospective Payment System.”
The hospital and clinic will be financially balanced, that is, income from Medicare payments will cover in full all operating costs. GAH and the Community Clinic
“Medicare Prospective Payment System”
The hospital is reimbursed by the government per procedure and/or treatment by a predefined sum and not by the actual expenses performed for and on a particular patient.
For example – a patient requiring open heart surgery will utilize the services of physicians, nurses, OR, laboratory, pharmacy, and occupies a hospital bed on average for six days. If a certain patient is discharged after four days, the hospital will still be paid the six-day amount. Hence, the incentive to operate efficiently and effectively, enabling the hospital to “save money.”
Based on the services you have decided to provide – at least six, complete the table (GAH Project):
Input services/treatments in column A.
Input estimated and rounded Medicare reimbursement to GAH (in thousands of dollars) for each treatment in column B (assign for each a figure between $10,000 to $60,000).
Your instructor has inputted the projected number of procedures/treatments performed annually at GAH in column C.
Calculate the total income for GAH by multiplying columns B*C in column D.
Your instructor has inputted the GAH Projected Performance percentage, relative to the Federal standard (100%) in column E.
Calculate the total GAH gain or loss by D-(D*E) in column F.
Assume a $250,000 annual miscellaneous expense.
Prepare (based on the table), a forecast of profit or loss for GAH for the first year of operation.
Conclusions and Recommendations. GAH and the Community Clinic
Project Financing and Budgeting
The evaluation of financing and budgeting at GAH and Community Clinic begins with the definition of the following terms;
Cost of facility construction – The term refers to the total value of finances required to cover all expenses involved in the project. The hospital aims at coming up with new facilities that will expand the level of services provided on a daily basis (Ng, Xie, Cheung, & Jefferies, 2007). The determination of the total cost of the project will aid in coming up with the financial needs to achieve particular objectives over a specific period.
Initial medical equipment and instrumentation – The term refers to the equipment that will be used during the initial period of the operation of the hospital. The initial equipment will entail the establishment of the relevant machinery that will meet patient demands by providing a variety of medical response needs. The medical instrumentation will encompass tools that will be required by the medical personnel to attend to the various needs of the customer.
The finance and budgeting part of GAH and Community Clinic examines the relevant needs required to ensure that the organizations work towards meeting the respective goals. The evaluation of the financial perspective of any firm is relevant for the determination of the appropriate funds required for its smooth operation. The finance department of an organization helps in the determination of the financial needs in the various departments that make up its daily operations. A major perspective involved in the determination of the various financial needs of a firm encompasses forecasting (Baker & English, 2011). Forecasting helps in the determination of expected finances required to finance various activities that take place. For example, forecasting of the various profit levels that a firm may realize helps in putting in place appropriate measures to achieve such objectives within the specified time in the future.
Another crucial aspect of financial analysis encompasses budgeting. Budgeting encompasses the creation of a financial plan on how a firm will obtain and spend its finances over a particular period. The budgeting process involves prioritizing operations that a firm may undertake to ensure that it undertakes those that result in the realization of a huge level of profits (Bierman & Smidt, 2012). Drafting of an appropriate budget helps a firm to plan its activities and hence increasing chances of the achievement of expected goals in the future. The budget estimation table for the proposed projects follows below;
Service and Treatment Estimated RPS Reimbursement Projected Number of procedures /Tx performed annually Total Income(B*C) GAH projected performance relative to federal standards GAH Projected annual gain (loss) [D-D*E)
1 Congestive heart failure $ 40,000 85 $ 3,400,000 80% $ 680,000
2 Pneumonia $ 30,000 10 $ 300,000 75% $ 75,000
3 Coronary atherosclerosis $ 20,000 50 $ 1,000,000 110% $ (100,000)
4 Cardiac dysrhythmias $ 20,000 20 $ 400,000 80% $ 80,000
5 Heart Attack/MI $ 60,000 25 $ 1,500,000 90% $ 150,000
6 COPD (Chronic Obstructive Pulmonary Disease) $ 60,000 10 $ 600,000 120% $ (120,000)
7 CVA (Cerebral Vascular Accident) $ 40,000 10 $ 400,000 115% $ (60,000)
8 Osteoarthritis $ 20,000 50 $ 1,000,000 95% $ 50,000
Diabetes $ 60,000 85 $ 5,100,000 85% $ 765,000
9 Miscellaneous $ 30,000 25 $ 750,000 75% $ 187,500
10 Miscellaneous expenses $ (250,000)
Profit (or loss) $ 1,457,500
Total $ 380,000 $ 14,450,000
The evaluation of the table above shows that the hospital has put in place relevant measures to ensure that it covers huge medical needs demanded by patients. The hospital has targeted to provide a total of 10 specialized medical services during the first year of operation. The provision of specialized medical attention will aid in the provision of medical needs to a large proportion of people with diverse medical complications.
The first column of the table outlines the form of service or treatment that the hospital will provide during its first year. The second column outlines the estimated amount of the reimbursement that the firm aims to realize from the government due to the provision of the specialized medical services to the public. The hospital reimbursement system employed by the government is on a fixed basis regardless of the actual costs incurred during the provision of such services to patients. The third column encompasses the number of activities that the hospital projects to achieve from its various types of services during the first year. The hospital estimated that the largest number of patients that will seek medical attention entails both congestive heart failure and diabetes. The prediction is viable due to the old population of the target group of people. The hospital targets patients with over 65 years and hence showing that a large proportion may have a high risk of suffering from diabetes and heart-related illnesses. The old also have reduced risks of suffering from pneumonia, COPD (Chronic Obstructive Pulmonary Disease) and CVA (Cerebral Vascular Accident). The low risk of such illnesses makes the hospital to forecast a small number of patients as compared to the other categories. The fourth column highlights the expected level of income that the hospital will realize from the provision of services during the first year. The revenues have a strong positive correlation to the number of activities that may be provided to the patients. Services which have a large number of people expect to have enormous forecast income (Kerzner & Kerzner, 2017). For example, the hospital has forecasted a high level of income from congestive heart failure while it expects less income from COPD (Chronic Obstructive Pulmonary Disease) due to the few numbers of expected activities in the program. GAH and the Community Clinic
The fifth column encompasses the GAH projected performance relative to federal standards. The column shows the expected level of service delivery as compared to the required federal standards. The COPD (Chronic Obstructive Pulmonary Disease) category has the highest level of relative performance with 120 percent while pneumonia has the least with 75 percent. The highest relative rate in the category of COPD (Chronic Obstructive Pulmonary Disease) results from the high level of efficiency in the utilization of the finances in that level. The category of service delivery with the highest level of relative performance as compared to that of the federal standards will result in the incurrence of a high level of costs than the forecast gains during the first year. The final column encompasses the GAH Projected annual gain (loss). The column indicated the net gain or loss that the firm would realize from the involvement in the various categories of service delivery. The computations show that the diabetes category of service delivery will result in the realization of the highest profit level of $765,000. On the contrary, the COPD (Chronic Obstructive Pulmonary Disease) will result in the realization of the highest level of losses at ($120,000).
The overall forecast net income at the hospital is $ 1,457,500. The positive income shows that the hospital will realize profits during its first year.
Conclusion
The evaluation of the GAH financing project shows that the management has taken relevant measures to ensure that it achieves the expected goals within the first year of its establishment. The hospital’s finance and management departments have enhanced the determination of the budgetary needs to finance all the operations throughout the year. Appropriate forecasting of the budget needs has aided in the determination of the various costs and incomes that the hospital aims at experiencing in its operations. The budget may help the hospital to gain extended government support in the provision of various needs for its smooth operations. The forecasting will aid the hospital’s management to come up with the most appropriate strategies that will enhance its success in the future.
Recommendations
The evaluation of the budget forecast table has shown that GAH hospital has implemented the relevant measures to forecast possible gains and costs from its operations before the actual project takes place. The evaluation of the budget table shows that the project will result in profits of $1,457,500 during its first year. The realization of profits during the period shows that the project is viable for investment as the gains will exceed costs. The expectation of a huge level of profits is a positive sign that GAH hospital should proceed with the project. However, the organization should utilize other project evaluation techniques such as net present value (NPV) and internal rate of return (IRR). The use of NPV may help in the determination of the level of gains from the investment over a particular period. The IRR may also help in the determination of the profitability of the project in the future (Stewart, 2008). Another analysis technique for the application may entail payback period. The technique may aid in the determination of the time the project will require to make returns equal to the initial investment. The application analysis techniques mentioned above may help in the determination of the viability of the project to ensure that it meets all the expected needs before its implementation (Ardalan, 2012). There is a need for GAH hospital to conduct a thorough analysis of the project before its implementation to ensure that it meets the desired objectives.
References
Ardalan, K. (2012). Payback Period and NPV: Their Different Cash Flows. Journal of Economics and Finance Education, 11(2), 112-143.
Baker, H. K., & English, P. (2011). Capital budgeting valuation: Financial analysis for today’s investment projects. New York: John Wiley & Sons.
Bierman, H., & Smidt, S. (2012). The capital budgeting decision: economic analysis of investment projects. London: Routledge.
Kerzner, H., & Kerzner, H. R. (2017). Project management: a systems approach to planning, scheduling, and controlling. New Jersey: John Wiley & Sons.
Ng, S. T., Xie, J., Cheung, Y. K., & Jefferies, M. (2007). A simulation model for optimizing the concession period of public-private partnerships schemes. International Journal of Project Management, 25(8), 791-798.
Stewart, R. A. (2008). A framework for the life cycle management of information technology projects: ProjectIT. International Journal of Project Management, 26(2), 203-212.