Financial planning

The CFO of St Frances has asked you as a Business Analyst to do a 5-year business plan for this new Outpatient Diagnostic Center.

They want to do the following imaging services at the new Outpatient Diagnostic Center: X-rays, computerized tomography (CT) scans and magnetic resonance imaging (MRI)

Based on the prior experience and the community needs, they estimate the following volume of diagnostic exams by Financial Class/Payor in the first year of operation.

Based on the current charges at their other diagnostic centers, gross charges for the new services will be as follows:

X-ray $250.00

Ct Scan $650.00

MRI $1,050.00

Based on their current contracts with the different payors, they expect the net revenue per imaging will be as follows:

Operating expenses are estimated as follows:

Staffing: 2 Full Time Supervisors at $42.00 an hour, 9 Full Time Technicians/Technologists at $32.00 an hour, 3 Clerical staff at $22.00 an hour (1 FTE = 2,080 hours per year).

Current benefits (including health insurance) are running at 30% of salaries.

Other operating expenses:

Supplies $8,000 per month

Rent $20,000 per month

Utilities $10,000 per month

Other department expenses $4,000 per month

Direct Overhead expenses including billing, collection, coding, registration, etc. are estimated to be at $25 per exam.

Corporate office overhead allocations are estimated at 20% of the total department expenses (including direct overhead but excluding depreciation).

The capital expenditure for this project are estimated as follows:

Imaging machines have 5 years of useful life. St Francis uses straight-line method to depreciate all imaging machines and other capital expenses related to installation and renovation of diagnostic centers. The best estimate of the machines net salvage value after the five years of use is $500,000.

St. Francis Healthcare’s weighted average cost of capital (WACC) is 12% and is used as their discount rate when budgeting for a new project.

It is estimated that the gross charges will increase by 4% per year. It is a growing community and St Francis management expects that the volume will grow by 2% per annum. Based on their current insurance contracts, the Net Revenue is expected to increase by 3% per year. Also, expenses are expected to increase by 4% per year.

Using the information given above, you are asked to develop a business plan for this Outpatient Diagnostic center.

The business plan should include the following data/information:

1. a. Gross and Net Patient Service revenue by Financial class/Payor budget for the period of 5 years.

b. Detail Expense budget for 5 years.

c. Income statement for 5 years.

d. What is the project’s payback period? What are the deficiencies of payback method when used as a project selection criterion?

e. What is the project’s NPV at WACC of 12%?

2. What is the payor mix % for Year 1 using gross revenue?

3. Would you recommend opening this new Diagnostic Center?

4. What other factors including internal and external would you consider when doing this business plan?

5. There is a rumor that a big national company is also looking to open a free standing diagnostic center in that area within the next two years. It is estimated that if the new diagnostic center is opened, it will result in decrease in volume for St. Francis by 5% per year (in year 3-5). Also, Commercial/Managed Care insurance companies are looking ways to cut their cost by reducing hospital reimbursement. One way is to index their reimbursement to Medicare. Managed Care/Commercial insurance are considering paying 150% of Medicare rates starting year 3. Assuming everything else remains the same, show the impact this will have on net revenue, income statement, payback period and NPV using 12% cost of capital. What would be your recommendation based on the new information?


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