HLTB21H3 Lecture Notes - Lecture 3: Leprosy, Borderline Personality Disorder, Mycobacterium Leprae

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salmonpanda260

31 Oct 2010

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The occurrence of leprosy has been recorded throughout history. Thought to be referred to in an egyptian papyrus document (1550 bc) In the records of ancient greece, after the army of alexander the great returned from india (320 bc) In rome (62 bc) with the return of pompeii"s troops from asia minor. Earlier thought to be a hereditary illness, or one that was caused by a curse or by punishment by god. Lepers were stigmatized and shunned from society. In europe - had to wear special clothing with a bell that would notify others of their impending arrival. Patients treated in separate hospitals and often had to live in colonies called leprosariums/ lazaretto/leper colony/lazar house. First leper house" in england 936 ad. Mid 12th century - loss of civic status, removal from public of ce. 13th century - 19,000 leprosaria" in use. Mass separation (set of rules, cannot enter church, cannot touch anything public)

Related Questions

Investigation of Possible Bioterrorism-Related Activity

Patient History:

A 38-year-old woman who resided in the Northeast was admitted to the hospital with fever, myalgia, and weakness, which progressed over 3 days to respiratory failure requiring mechanical ventilation. On day 22, after 3 weeks of intensive care, the patient was still febrile. Cultures of blood were negative.

Hospital personnel interviewed family members who reported no history of traditional risk factors for fever of unknown origin (e.g., relevant food, infected animal contact, or travel history). On day 24, the patient's family reported to hospital personnel that the patient's illness might have been caused by exposure to laboratory flasks and cultures kept in her apartment by her boyfriend. He was described as a foreign national studying biology, but recently he had returned to his country of citizenship. On day 25, the patient's family brought laboratory flasks, Petri dishes, and culture media to the hospital from the patient's apartment. Several contained an unidentified clear liquid. The patientâs unresponsiveness and the acknowledged potential for some bacterial species to be used as bioterrorist agents raised concerns among the infection control staff that this case might be associated with a bioterrorist event or unintentional exposure to contaminated materials in the patient's home. The hospital contacted local law enforcement, the Department of Public Health, and the Federal Bureau of Investigation about the unusual circumstances surrounding the case.

On day 30, under the authority of state communicable disease statutes and in cooperation with the local police department, fire department, and hazardous materials unit, NHDHHS personnel entered the patient's apartment to assess any possibility of an ongoing public health hazard. Remaining flasks were removed and cultured. After 48 hours, growth of a translucent, pinpoint, and smooth colony appeared on blood agar and chocolate agar.

Gram stain of the colonies revealed faintly staining Gram-negative rods that were catalase positive, oxidase positive, and rapidly urea positive. On day 33, the patient began to get better after extensive antibiotic therapy.

Early detection is essential to ensure a prompt response to a biological terrorist event. Local public health authorities must rely on clinicians to recognize and report suspicious or unusual presentations of disease. However, correlating suspicious cases originating from diverse locations or discerning an increase in common presentations above the normal baseline is difficult. As in this case, public health practitioners coordinating disease surveillance may be able to receive reports of rare diseases and to determine whether they are occurring at a higher than normal rate in a large surveillance area.

The CDC, in collaboration with local, state, and territorial health departments, is enhancing existing disease surveillance systems for specific diseases that are normally rare in the United States but thought to have a high potential for public health impact if used as biological terrorism agents. This is being accomplished by improving training of clinical, laboratory, and public health personnel in recognizing suspicious disease presentations and by expanding of existing, disease-specific surveillance infrastructure. In addition, surveillance is being improved for disease presentations, such as acute respiratory distress, hemorrhagic, or meningeal symptoms normally caused by common infectious agents, but that could indicate an increase in illnesses caused by a biological agent used in terrorism. Surveillance mechanisms to rapidly assess changes in rates of disease include monitoring of calls to local emergency medical systems, regularly reviewing emergency department discharge diagnoses, and linking infection control practitioner networks.

Assignment:

For this case study, write a 1-page report that describes the possible agent of bioterrorism along with pathogenesis, treatment, and prevention. Include a brief discussion of sentinel labs and their role in recognizing potential episodes of bioterrorism.

Please help

rubyhare610

Summarize the key points for the Hospital Corporation of America case. What were the results of any analysis and what were the key takeaways.

Please no plagiarism

Hospital Corporation of America (A)

In January of 1982 Hospital Corporation of America (HCA) faced a complex financial situation. Following a major acquisition in 1981, HCAâs ratio of debt to total capital approached 70%âwell in excess of its target ratio of 60%. Interest coverage had dropped to 2.4 times, below its target of 3.0 times, and the lowest level experienced since HCA founding in 1968. Although some investors justified and even welcomed HCAâs more aggressive use of leverage, others were concerned that HCAâs capital structure could cost the company its single-A bond rating. Mounting interest expense on the debt could also cause HCAâs first quarter earnings per share (EPS) to decline relative to those of a year ago. If it did, this would be the first such quarter-to-quarter decline in EPS in HCAâs 13-year history. In light of these developments, HCAâs management had to decide what, if anything, should be done about its capital structure and what specific steps should be taken soon to achieve the desired mix of debt and equity. HCAâs Early Development HCA is a proprietary, hospital management company founded in Nashville, Tennessee, by two physicians, Thomas F. Frist, Sr., and Thomas F. Frist, Jr., and a former pharmacist, Jack C. Massey, who was also the former owner of Kentucky Fried Chicken. Beginning with only one, 150- bed hospital in 1968, HCA grew to become the nationâs largest hospital management company. By 1981 HCA owned or managed 349 hospitals in the United States and overseas and had net operating revenues of $2.1 billion. Since its founding, HCA had 32.2% annual revenue growth and 32.6% annual earnings growth. Pretax profit margins, averaging 9%, were the highest and most consistent among the major proprietary hospital chains. Recent financial statements and a 10-year summary of HCAâs operations appear in Exhibits 1â4. The Proprietary Hospital Industry Proprietary hospital management companies, i.e., corporations that own and manage chains of hospitals on a for-profit basis, were a relatively new phenomenon in the $118 billion U.S. hospital care business. The enactment of entitlement programs such as Medicare and Medicaid in 1965 stimulated demand for hospital services in the United States and virtually eliminated the tremendous bad-debt burden (i.e., weak accounts receivable) that had traditionally plagued the hospital industry. This created a valuable opportunity for private investors to build or acquire hospitals and operate them profitably. Tight control over costs and efficiencies in such areas as staffing, purchasing, and hospital design enabled hospital management companies to offer high-quality services at reasonable cost while achieving attractive profit margins. With the ability to sell equity and other financial securities not generally available to nonprofit hospitals, proprietary hospital management companies expanded rapidly in the 1970s. While the number of hospitals operating in the United States actually declined steadily from a high of 7,200 between 1975 and 1980, the proprietary hospital chains expanded the number of hospitals under their control at a 12.5% annual rate. By 1980, 38 proprietary hospital chains owned or operated 12.4% of the 6,965 hospitals and 7.9% of the 1,370,000 licensed hospital beds in the United States. In 1981 the five largest hospital chains controlled 632 hospitals and 87,502 beds. (Exhibit 5 presents a comparison of the major hospital chains.) The expected revenue growth for the hospital management companies as a group was approximately 13â14% annually throughout the 1980s. The five major chains, however, were expected to grow at an annual rate of 25% during the first half of the decade. Although still rapid, this expected growth rate was less than the 35% annual rate they experienced between 1975 and 1980. The shrinkage in the number of attractive acquisitions, along with higher costs for construction and acquisition, were blamed for the expected slowdown. HCAâs Past Growth HCA achieved growth during the 1970s by acquiring existing hospitals and constructing new units. Between 1968 and 1981, HCA constructed 70 new and replacement facilities and acquired or leased the remaining 279 of its hospitals. Each year HCA evaluated many potential acquisitions and areas for construction, but it was rather selective in the facilities it acquired. The criteria for selection included the target communityâs need for health care services, the quality of the target hospitalâs medical staff and personnel, the population growth pattern in the area served, the facilityâs suitability for future expansion, and the hospitalâs overall financial position. Most of HCAâs domestic hospitals were located in the Southeast and the rapidly expanding Sunbelt area of the United States (see Figure A). This geographic preference reflected, in part, the more favorable regulatory environment in these areas of the United States and, in part, their more favorable demographic trends. Roughly 40% of HCAâs U.S. facilities were the only hospitals in their areas. Some of HCAâs unit growth came through the acquisition of other proprietary hospital management companies. A run on other proprietary chains was triggered in 1978 when Humana, Inc., merged with American Medicorp, the third largest chain. Following that acquisition, by 1981 ten other hospital management companies were acquired by the five majors; HCA accounted for four of these acquisitions. The last of HCAâs four acquisitions occurred on August 26, 1981, when it purchased Hospital Affiliates International from INA Corporation, an insurance company, for $425 million cash and common stock valued at $190 million. This acquisition gave HCA ownership of 57 additional hospitals and management contracts for another 78 hospitals.1 With revenues of $704 million and earnings of $29 million in 1980, Hospital Affiliates had been the nationâs fifth largest hospital management chain. Sources of Capital HCAâs operations generated substantial cash for reinvestment. However, its ambitious construction and acquisition program also required substantial financing from external sources. External financing during HCAâs early growth period generally followed a simple pattern: revolving bank credits were used to fund hospitals under construction, while industrial revenue bonds and privately placed, long-term mortgage loans from insurance companies funded completed hospitals and acquisitions. Other sources of capital proved difficult to tap at first because of the newness of the proprietary hospital industry, the small size and short track record of HCA itself, and the generally poor image of hospital management companies at that time. As the hospital management industry matured, however, and HCAâs strong performance became recognized, HCA began to use other types of financing. HCAâs $33 million issue of 15-year first mortgage bonds in 1975 was the first public bond offering undertaken by a hospital management company. Standard and Poorâs initially rated the bonds BBB and later upgraded them to A.2 Attempting to tap sources of funds overseas, HCA also issued $25 million of Eurodollar notes in 1978. In another first for the industry, the company sold $47 million of commercial paper in 1980; the issue was rated A-2 by Standard and Poorâs and P-2 by Moodyâs. In 1981 HCA added $891 million of debt to its balance sheet. Most of this debt was to mature in less than seven years, and a substantial portion of it bore fluctuating interest rates that were tied to the prime rate or the London Interbank Offered Rate (LIBOR).3 (Exhibit 6 shows a complete schedule of HCAâs debt.) Revolving bank credit (used to finance the purchase of Hospital Affiliates) constituted $425 million of this debt. This sudden increase in the level of debt made HCA the highest leveraged company in the United States with a single-A bond rating. HCA had also issued common stock on several occasions. It built its capital base with public offerings of new equity in each of the three years from 1969 to 1971. After 1971 HCA had only two public offerings of stock: one in 1976 and the other in 1979, when it sold 2.2 million common shares and received net proceeds of $85.8 million. This was the largest stock deal by an industrial company that year. HCA also issued new common shares in connection with some of its acquisitions. HCAâs management did not want to issue new equity any more frequently than every other year. Nonetheless, management carefully maintained close contact with the equity market. It did so through frequent presentations to security analysts and clear and complete disclosure of information in HCAâs financial reports. HCAâs Future Growth One of HCAâs principal objectives was to realize at least 13% annual growth in earnings per share (after inflation). This meant that HCA needed annual growth in the 25% to 30% range (including inflation) for the foreseeable future. This aggressive rate was sought for several reasons. One major reason was the competition from other management companies in acquiring hospitals. As Bill McInnes, vice president of finance for HCA, noted: There is a feeling here that we must be prepared to strike while the iron is hot. There are only 7,000 hospitals out there, and we canât expect to have them all. With, perhaps, three to five good years [of growth by acquisition] left, we will have to move along expeditiously to get our fair share. Management also recognized that HCAâs expected growth rate was a major factor influencing the price of the companyâs equity. McInnes observed that, âThis is a company in which people check the stock price two or three times a day. No one wants to see what will happen [to the stock price] if the growth rate starts to unwind.â The officers and directors of HCA as a group owned 3.6 million shares of HCAâs common stock and 1.8 million options on HCAâs common shares. Managementâs attention to growth and its impact on equity prices was undoubtedly heightened by security analyst reports on HCA, many of which predicted 1982 earnings per share of $3.00, a 35% increase over 1981. Management expected growth to come from the same four sources that had provided it since the companyâs founding: acquisition, construction of new hospitals, expansion of services, and the signing of new management contracts. There were some indications that the company was likely to expand into new areas, but only into other health services such as home health care and outpatient surgery. As for future acquisitions, it seemed likely that a somewhat different tack would be taken. Many analysts and industry participants believed that antitrust laws would limit the acquisition of other hospital management companies as a major source of new growth for the large chains in the 1980s. It was believed that further growth by acquisition would have to occur primarily through the purchase of nonprofit county, municipal, and religious-order hospitals. Many such hospitals had old buildings that required renovation, had obsolete equipment, and had unsophisticated management systems. The unwillingness or the inability of their owners to raise taxes or issue new debt to continue operations meant that many of these units would be offered for sale. HCA appeared to be well positioned for this market. Interestingly, this position had as much to do with HCAâs quality image as its financial strength. Because of its industry leadership, its decentralized management style, and the high quality of its corporate management, HCA was considered to be one of the most attractive bidders among the major hospital management companies. Its list of directors read like a page from Whoâs Who in Finance and Industry: the board, chaired by Donald MacNaughton, former chairman and chief executive officer of Prudential Insurance Co. of America, included such prominent business leaders as Robert Anderson, chairman and CEO of Rockwell International Corp.; Frank Borman, chairman, president, and CEO of Eastern Air Lines; Owen Butler, chairman of Procter & Gamble Co.; John de Butts, retired chairman and CEO of American Telephone and Telegraph; and Irving Shapiro, chairman of the finance committee of E. I. duPont de Nemours & Co., Inc. HCAâs quality image helped overcome the misgivings that some of the owners of nonprofit hospitals often had about selling to a profit-oriented management company. Many nonprofit hospitals were directed by politicians, public agents, and other public figures who sometimes balked at the thought of profits being earned on the care of sick people, or who incorrectly believed that the past abuses associated with nursing home companies also characterized the proprietary hospital management business. HCAâs quality image was often the critical factor in overcoming the doubts of such trustees and convincing them to sell to HCA. HCAâs Financial Goals Besides its growth objective, HCA had several other explicitly stated goals and guidelines, and a very important one among them was its 60% target ratio of debt to total capital. This target was in line with the degree of leverage more or less expected by the rating agencies for an A-rated hospital management company. Its origin, however, was somewhat informal. It was the practice for real estate development projects to be financed on a 75% loan-to-value basis, but in its early years HCAâs management reasoned that since 15% of its expenditures on hospital projects were for equipment rather than property or plant, management would be conservative and use only 60% debt financing for its hospital construction. Ultimately, this ratio became the standard for the entire proprietary hospital management industry. Many hospitals in the 1980s, however, were built and operated on a stand-alone basis, with as much as 90% debt financing, and a case could be made on comparative grounds for a higher debt ratio for a healthy hospital management company. In fact, several of HCAâs managers expressed the belief that HCA could comfortably accommodate as much as 75â85% debt in its capital structure. Return on total capital was expected to be a minimum of 11% after taxes, and return on equity was expected to be at least 17% after taxes. These target rates of return were important, but they were difficult to maintain during periods of rapid growth, especially when the growth was achieved largely through acquisition. Acquired hospitals usually needed to be turned around, and this process often took several years of operations with reduced profit margins. HCAâs other goals included a dividend payout of 15% of net income and the maintenance or improvement of net profit margins as a percent of operating revenues. Sam Brooks, senior vice president of finance and chief financial officer of HCA, had also expressed his desire to keep the average interest cost for all HCAâs debt at 15% (or lower) in the foreseeable future. Regulatory Change and the Future The future of the hospital management industry appeared bright in several respects. In the near term, continued growth in revenues and earnings seemed assured by the acquisition of nonprofit hospitals, and in the long run, as growth by acquisition and new construction subsided, the natural expansion of an aging U.S. population was expected to increase occupancy rates and provide further growth. Moreover, because of the high operating leverage created by hospitalsâ fixed costs, much of the growth in revenues due to higher occupancy rates was expected to translate directly into higher earnings. The provision of additional services and a concentration on further cost containment, rather than geographic expansion, could further add to growth in earnings in the long run. This industry scenario was not without its risks, however. The federal government had been exploring ways to cut federal expenses for Medicare, VA hospitals, and other government-backed health care programs. Various forms of industry deregulation were favored in the political climate of the early 1980s as a means of improving efficiency and increasing consumer welfare. Regulatory reform of health care could have far-reaching implications for the hospital management companies. For example, under the present regulatory system, hospital expansion was controlled by local, health-planning agencies through âcertificates of need.â These certificates, needed for new hospital projects, were granted only if it could be demonstrated that a genuine need existed for the new services or expanded capacity. These requirements were a bureaucratic headache for hospitals, but they restricted new hospital construction and thus tended to provide existing hospitals with protected franchises. This protection would be removed under proposals to eliminate these certificates. This might stimulate rapid expansion by competing hospitals and possibly result in the duplication of services, excess bed capacity, and lower occupancy rates. The average occupancy rate for all U.S. hospitals was already only 75% in 1979, down from 83% in 1969. Various proposals to reform the nationâs system of health care insurance so that consumers would become more price sensitive and hospitals more cost conscious were of equal concern. Because 90% of all Americans were covered by some form of health insurance, the bulk of hospital revenues came from third-party payers, and the demand for hospital services by the consumer was relatively price insensitive. It had been estimated that hospitals could vary their prices by as much as 20% (up or down) without a material effect on patient utilization.4 Similarly, because most hospitals received a substantial part of their reimbursements from government-backed programs such as Medicare and Medicaid, their incentives to control costs were diminished. Such reimbursement programs were âcost basedââthat is, hospitals were reimbursed for their costs of providing services to covered patients. Costs allowable under Medicare/Medicaid programs included depreciation and interest, but excluded costs of research, losses on bad debts, and expenses for charitable cases. In addition, Medicare allowed a return on equity (excluding assets and liabilities unrelated to patient care) at a rate equal to 150% of the average annual interest rate on certain debt obligations of the Federal Hospital Insurance Trust Fund. The pretax return on equity allowed was 12.3% in 1978, 13.7% in 1979, 16.5% in 1980, and 20.0% in 1981. One of the effects of this insurance system in the United States was to provide hospitals with relatively stable revenue streams that were largely insulated from economic cycles, inflation, and other economy-wide risks. Another result was that hospitals tended to compete with one another on the basis of quality and breadth of services, reputation of medical staffs, and advertising, rather than on the basis of low prices. Proposals to make consumers bear a greater proportion of their hospital expenses out of their own pockets and to change Medicare and Medicaid to something other than cost-based reimbursement systems would change these characteristics significantly. Some of the proposals being considered included treating health insurance premiums paid by employers as taxable income to employees, increasing the level of out-of-pocket expenses borne by Medicare/Medicaid patients, turning the Medicare program into a voucher system that provided fixed benefits independent of costs, eliminating return on equity provisions in Medicare and Medicaid reimbursements, and revising the Medicare/Medicaid programs so that they were prospective reimbursement systems. Under prospective reimbursement, hospitals would be paid on the basis of âprospectivelyâ set rates rather than actually realized costs. If a hospital provided services at a cost lower than the established rates, it earned a profit; it not, it realized a loss. Most industry analysts predicted that some form of prospective reimbursement would be implemented in the 1980s, but the exact composition of hospital costs that would be covered by such a system was unclear. A system might be designed in which capital costs would be prospectively set along with the other costs of providing services. If this were to occur, hospitals would no longer be able to count on recouping the full amount of their allowable interest expense from the federal government. Another possibility was that interest expenses would continue to be paid retrospectively, but the return on equity provisions would be dropped altogether. This outcome would place even greater pressure on the private-patient side of a hospitalâs business to provide an adequate return on capital. Whatever type of prospective reimbursement system might be adopted, it seemed probable that the virtual elimination of losses and the subsidization of capital costs heretofore provided by the cost-based reimbursement system would be reduced. This would instill greater volatility in hospital revenues and earnings. HCAâs Financial Decisions HCAâs growth objective called for capital expenditure outlays of $575 million in 1982. This amount could be expected to expand by 20% a year for the next several years. Given these increasing capital requirements, its debt repayment schedule (see Exhibit 6), the future prospects of the hospital care industry, and HCAâs other goals, senior management had to determine how best to prepare financially for HCAâs future. The first issue to be addressed was HCAâs target capital structure: Was its long-standing 60% target ratio of debt to total capital too high, too low, or about right? The rating agencies declared that HCA would have to return to its 60â40 capital structure if it was to retain its A bond rating. In a meeting with the rating agencies prearranged for the day after the acquisition of Hospital Affiliates was announced, Sam Brooks was âgiven the distinct impression that we had roughly until the end of the summer of 1982 to do something about our debt ratio.â Loss of its A bond rating could make access to the debt markets more difficult for HCA. (Historical data on debt issued with various credit ratings are presented in Exhibit 7.) Others, however, saw HCAâs high level of debt in a more positive light. A Wall Street analyst was quoted as saying that the acquisition of Hospital Affiliates and the debt burden that accompanied the transaction âremoves the stigma, if it is one, that Hospital Corp. is too conservative. It said for a long time that it would stick to a 60â40 ratio of debt to equity . . . [This] shows theyâre willing to be flexible when the right move comes along.â5 Although maintaining its high degree of leverage would cost HCA its A bond rating, the loss might not be all that damaging. DuPont, for example, lost its long-standing AAA bond rating after its acquisition of Conoco in 1981 without a dramatic rise in its cost of debt or decreased access to the debt market. Others argued that even a 60% ratio of debt to total capital would be too high in light of the potential changes in the regulatory environment. By increasing the risk surrounding the cash flows of the hospital management companies, such changes might necessitate a capital structure with only 50% debt or less. Reducing leverage to such a level would take time to accomplish and would require corrective action well in advance of the anticipated changes even if one were beginning at a 60% debt level. As Bill McInnes said, âA $2.5 billion capital structure canât be turned around on a dime.â

Florida Keys Hospital is a 250-bed, investor-owned hospital located in Islamorada, Florida, which is known as the âSport Fishing Capital of the World.â 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 Keys have experienced a population explosion, which has fostered high economic growth as well as a continuing need for more healthcare services. Today, under a succession of excellent chief executive officers, the hospital is acknowledged to be one of the leading healthcare providers in the area.

Florida Keysâ management is currently evaluating a proposed ambulatory (outpatient) surgery center. Over 80% 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 one-half hoursâminor procedures take about one hour or less, and major procedures take about two or more hours. About 60% of the procedures are performed under general anesthesia, 30% under local anesthesia, and 10% 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 2005 the number had grown to over 7 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 switched to 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 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 3,300, so competition in many areas has become intense. Somewhat surprisingly, there is no outpatient surgery center in the hospitalâs immediate service area, although there have been rumors that local physicians are exploring the feasibility of a physician-owned facility.

Florida Keys Hospital currently owns a parcel of land adjacent to its facility tht is a perfect location for the surgery center. The hospital 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 todayâs market, the land would bring in $200,000, net of all fees, commissions, and taxes. Land prices have been extremely volatile, so the hospitalâs 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 will house four operating suites, would cost $5 million and the equipment would cost an additional $5 million, for a total of $10 million. For ease, assume that both the building and the equipment fall into the modified accelerated cost recover 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 the hospital 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, the hospital 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 asstâs salvage value and it 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 revenue amount to $1,000. 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 $696,000 per year, including fringe benefits. Utilities, including hazardous waste disposal, would add another $50,000 in annual costs.

If the surgery center were built, the hospitalâs 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 Florida Keysâ current $2.8 million in administrative overhead costs. On average, each procedure would require $200 in expendable medical supplies, including anesthetics. Although the hospitalâs inventories and receivables would rise 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. The hospitalâs 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, the hospital 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 hospitalâs 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 Florida Keysâ directors stated that she thought the hospital was putting too much faith in the numbers: âAfter allâ, she pointed out, âthat 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 impact the services that we currently offer.â

Another director, who also is the hospitalâs 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 million 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 hospitalâs 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/equipment salvage value. If another entity entered the local ambulatory surgery market, the number of procedures could be as low as 10 per day. Conversely, if acceptance is strong and no competing centers are built, the number of procedures could be as high as 25 per day, compared to the most likely value of 20 per day.

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 were high (i.e., if a higher number of complicated procedures were performed than anticipated) and managed care penetration 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/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 to 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. âWhy not five or seven?â he queried. Additionally, he said that the executive program had taught him a good way to assess the impact of inflation on project profitability, which is to create and analyze an inflation impact table.

To help with the risk-incorporation phase of the analysis, Jules consulted with Mark Hauser, Florida Keysâ chief financial officer, about both the risk inherent in the hospitalâs average project and how the hospital typically adjusts for risk. Mark told Jules that based on historical scenario analysis data that use worst, most likely, and best case values, the hospitalâs average project has a coefficient of variation of net present value (NPV) in the range of 1.0 to 2.0 and that the hospital typically adds or subtracts 4 percentage points to its 10% corporate cost of capital to adjust for differential project risk.

Assume that Florida Keys 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 hospitalâs board of directors.

Questions to think about as you evaluate, analyze, and present your findings on this particular project:

What is âincremental cash flowâ? Because the project, at least constructively, will be financed in part by debt, should the cash flows include interest expense? Think about why or why not . . .

The hospital already owns the site for the center, so should any cost be attributed to the land? Why or why not . . .

What overhead costs should be included in the analysis?

How should the cannibalization of inpatient surgeries be handled?

What is the projectâs payback? What is the economic interpretation of payback? What type of information do decision-makers get from the payback?

What is the projectâs net present value (NPV)? Think about the economic rationale behind this profitability measure.

What is the projectâs internal rate of return (IRR)? Think about the economic rationale behind IRR. Do the NPV and IRR always lead to the same conclusion about a projectâs profitability?

What is the projectâs modified internal rate of return (MIRR)? How does MIRR differ from IRR? Which one is a better measure of a projectâs true rate of return?

To give the board a better feel for the impact of inflation on the outpatient surgery center, you may wish to construct an inflation impact table.

You may wish to conduct a sensitivity analysisâcreating a table and/or graph that shows the sensitivity of NPV to procedures per day, average charge, and salvage value. Assume that each variable can deviate from its base case value by +/-10, +/-20, and +/-30 percent. Think about the advantages and disadvantages of sensitivity analysis.

You may wish to conduct a scenario analysis. Does the expected NPV obtained here agree with the base case NPV? If not, why? Discuss the advantages and disadvantages of scenario analysis.

Should the ambulatory surgery center be classified as high risk, average risk, or low risk on the basis of the analysis thus far?

What is your estimate of the projectâs corporate risk? Its market risk?

Is there additional data you would seek from other hospital staff members to conduct a more thorough analysis? Can you think of any costs that might be associated with the project that have not been included in the analysis? Are there any potential benefits that have not been included? What qualitative factors should the board consider in making the final judgment on the project?

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