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1. A not-for-profit acute care facility, has the following cost structure for its inpatient services, and expects to have a patient load of 15,000 inpatient days next year:

Fixed costs $10,000,000

Variable cost per inpatient day 200

Charge (revenue) per inpatient day 1,000

a. What is the hospital

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Tod Thiel
Tod ThielLv2
28 Sep 2019

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St. Benedict Hospital has three primary revenue producingdepartments (Inpatient, Outpatient, Clinic) with the followingrevenue and cost projections. In order to better determine thedepartments’ overall true cost and profit margin, management wantsto allocate service department costs as overhead allocations tothese departments.
PROJECTED REVENUES AND COSTS PER DEPARTMENT

Revenues
Inpatient Services $18,500,000
Outpatient Services 32,000,000
Clinic Services 12,250,000
Total revenues $62,750,000

Direct Costs
Inpatient Services $8,250,000
Outpatient Services 16,500,000
Clinic Services 8,500,000
Total costs $33,250,000

Service Department Costs
Financial Services $4,000,000
Facilities 7,500,000
Housekeeping 5,600,000
Administration 8,500,000
Total overhead costs $25,600,000
Total Costs $58,850,000
Projected Profit $3,900,000

Management considered various cost drivers and made thedeterminiation to use the following as the most relevant for eachservice department:


Department Cost Driver
Financial Services Patient revenue
Facilities Square feet
Housekeeping Housekeeping hrs
Administration Salary dollars

Utlization information for allocations:
Cost Driver Inpatient Outpatient Clinic TotalUtilization
Square Feet 210,000 180,000 65,000 455,000
Housekeeping Hours 80,000 58,000 26,000 164,000
Salary Dollars $6,500,000 $12,500,000 $5,500,000 $24,500,000


Based upon this information, complete the following, filling ineach highlighted cell. Be sure to use formulas to show yourwork.


Use Exhibit 6.6 as a guideto complete this table and calculate theallocation rate.
Department Cost Pool Amount CostDriver Total Utilization AllocationRate
Financial Services
Facilities
Housekeeping
Administration

Use Exhibit 6.7 as a guide to complete the indirect costallocations to each patient service area.
Indirect Cost Allocations Inpatient Outpatient Clinic Total
Financial Services
Facilities
Housekeeping
General Administration
Total Indirect Costs

Using Exhibit 6.8 as a guide, complete the P&L projectionsbelow.
P&L
Revenue
Direct Costs
Indirect Costs
Total Costs
Profit using only Direct Costs
Profit margin % using Direct Costs only
Profit using Total Costs
Profit margin % using Total Costs

PART I: Calculation of the Capitation rate per member per month (PMPM) – Chapter 7 Goldberg and Silverstein (GS) is a for-profit mid-level HMO company, providing health plans mostly in metro areas. GS is exploring to extend its health plan in a fast growing community called Newtown. There are three acute care hospitals in Newtown. GS bought Griffith HMO to provide services in Newtown. Griffith HMO is providing health care plans in Newtown area for past ten years using Miller Hospital, one of the three hospitals in Newtown. You have been assigned to prepare capitation rates to offer a new contract to the Miller Hospital. You have researched the documentation from Griffith HMO, and collected the following information: Griffith HMO has currently 19,000 enrollees. The number of enrollees is expected for next year is 20,000. Here is expected utilization from the previous year data (suppose that hospital only provide the following services):  Inpatient days o 300 inpatient days per 1000 enrollees per year. o The cost of inpatient days: $1100 per day.  Outpatient Surgery o 450 surgeries per 10,000 enrollees per year. o The cost of per outpatient surgery is $900. Emergency Room Visit
o 50 per 1000, enrollees per month.
o The average cost of each ER visit is $300.
2
 Outpatient diagnostic (for CT Scan, MRI, Echocardiography, and Ultrasound)
o 100 visits per 1000 enrollees per year.
o The average cost is $500 per visit.
 Outpatient diagnostic (Other than CT Scan, MRI, Echocardiography, and
Ultrasound)
o 300 visits per 1000 enrollees per year.
o The average cost is $150 per visit.
The plan has 10% copay for inpatient services per day, $350 copay for each outpatient surgery,
$300 copay for ER visit and $50 copay for each diagnostic service per visit.
You are expected to 15% of copay as bad debt for Miller Hospital.
Griffith hospital uses physician services on a contractual basis and does not employ any
medical doctor. Therefore, GS will have separate capitation contract for physician services.
The coordination of benefit is expected to cover 1.2% of the total cost.
You are expecting 11% administrative cost. The CFO of GS suggested you include some profit
margin for the shareholders.
******************************************************************************
Calculate the capitation rate per member per month that will be offered to Miller Hospital
with 2% and 3.5% profit margin for shareholders.
Please provide total capitation rates per member per month and also for PMPM for each
service mentioned above to Miller Hospital) using an Excel worksheet

INPUT DATA: KEY OUTPUT:
Land initial cost $150,000 NPV $1,408,166
Land opportunity cost (and salvage value) $200,000 IRR 14.7%
Building/equipment cost $10,000,000 MIRR 12.9%
Build/equipment salvage value $5,000,000 Payback 4.0
Procedures per day 20
Average net revenue per procedure $1,000
Labor costs $696,000
Utilities costs $50,000
Incremental overhead $36,000
Supply cost ($/procedure) $200
Inflation rate on charges 3.0%
Inflation rate on costs 3.0%
Tax rate 40.0%
Revenues lost from inpatient surgeries $1,000,000
Reduction in inpatient surgery costs $500,000
Cost of capital 10.0%
MODEL-GENERATED DATA:
Depreciation Schedule:
MACRS Deprec. End of Year
Year Factor Expense Book value
1 0.20 $2,000,000 $8,000,000
2 0.32 3,200,000 4,800,000
3 0.19 1,900,000 2,900,000
4 0.12 1,200,000 1,700,000
5 0.11 1,100,000 600,000
6 0.06 600,000 0
Net Cash Flows:
Project Cash Flows
0 1 2 3 4 5
Land opportunity cost ($200,000)
Building/equipment cost (10,000,000)
Net revenues (including inpatient loss) $4,000,000 $4,120,000 $4,243,600 $4,370,908 $4,502,035
Less: Labor costs 696,000 716,880 738,386 760,538 783,354
Cost savings on inpatients (500,000) (515,000) (530,450) (546,364) (562,754)
Utilities costs 50,000 51,500 53,045 54,636 56,275
Supplies 1,000,000 1,030,000 1,060,900 1,092,727 1,125,509
Incremental overhead 36,000 37,080 38,192 39,338 40,518
Depreciation 2,000,000 3,200,000 1,900,000 1,200,000 1,100,000
Income before taxes $718,000 ($400,460) $983,526 $1,770,032 $1,959,133
Taxes 287,200 (160,184) 393,410 708,013 783,653
Project net income $430,800 ($240,276) $590,116 $1,062,019 $1,175,480
Plus: Depreciation 2,000,000 3,200,000 1,900,000 1,200,000 1,100,000
Plus: Net land salvage value 180,000
Plus: Net building/equipment salvage value 3,240,000
Net cash flow ($10,200,000) $2,430,800 $2,959,724 $2,490,116 $2,262,019 $5,695,480
Cumulative net cash flow ($10,200,000) ($7,769,200) ($4,809,476) ($2,319,360) ($57,341) $5,638,139
(For payback calculation)
Profitability and Breakeven Measures:
Net present value (NPV) $1,408,166
Internal rate of return (IRR) 14.7%
Modified IRR (MIRR) 12.9%
Payback

4.0
(Question)

What is “incremental cash flow”? 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 project’s payback? What is the economic interpretation of payback? What type of information do decision-makers get from the payback?

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

What is the project’s 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 project’s profitability?

What is the project’s modified internal rate of return (MIRR)? How does MIRR differ from IRR? Which one is a better measure of a project’s 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 analysis—creating 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.

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