answer 1-5 based on this article

Foundation of ACHE 5/8/18 Case 5 Twin Falls Community Hospital Capital Investment Analysis) Twin Falls Community Hospital is a 250-bed, not-for-profit hospital located in the city of Twin Falls, the largest city in Idaho's Magic Valley region and the seventh argest in the state. The hospital was founded in 1972 and today is acknowledged to be one of the leading healthcare providers in the area Twin Falls management is currently evaluating a proposed ambulatory (outpatient surgery center. Over 80 percent of all outpatient surgery is performed by specialist in gastroenterology gynecology, ophthalmology, otolaryngology Orthopedics, plastic surgery and urology. Ambulatory surgery requires an average of about one and one half hours, trunor procedures take about one hour or less, and major procedures take about two or more hours About 60 percent of the procedures are performed under general anesthesia: 30 percent under local anesthesia, and 10 percent under regional or spinal anesthesia, In general, operating rooms are built in paint to 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. This growth has been tueled by www factors. First, rapid advancements in technology have enabled many procedures that were historically performed in inpatient surgical sutes to be switched to outpatient Bettings. This shift was caused mainly by advances in laser, laparoscopic endoscopic, and arthroscopic technologies. Second, Medicare has been aggressive in approving now minimally invasive surgery techniques, so the number of Medicare patents utilizing outpatient surgery services has grown substantially Final, pallets prefer outpatient surgedies because they are more convenient, and third-party payers prefer them because they are less costly These factors have led to a situation in which the number of inpatient surgeries has grown seat all) in recent years while the number of outpatient procedures has been growing at over 10 percent annually and now totals about 22 million a year. Rapid growth in the number of outpatient surgeries has been accompanied by a corresponding growth in the number of outpatient surgical facilities. The number currently stands at about 5,000 nationwide so competition in many areas has become M prefer outpatient surgeries because they are more convenient, and third-party payers prefer them because they are less costly These factors have led to a situation in which the number of inpatient surgeries has grown little (if at all) in recent years while the number of outpatient procedures has been growing at over 10 percent annually and now totals about 22 million a year. Rapid growth in the number of outpatient surgeries has been accompanied by a corresponding growth in the number of outpatient surgical facilities. The number currently stands at about 5,000 nationwide. so competition in many areas has become intense. Somewhat surprisingly there is no outpatient surgery center in the Twin Falls area, although there have been rumors that local physicians are exploring the feasibility of a physician-owned facility The hospital currently owns a parcel of land that is a perfect location for the surgery center. The land was purchased five years ago for $350.000, and last year the hospital spent (and expensed for tax purposes) $25,000 to clear the land and put in sewer and willy lines. If sold in today's market, the land would bring in S500.000, net of realtor.commissions and foes. Land prices have been extremely volatile, so the hospital's standard procedure is to assume a salvage value equal to the current value of the land 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 Sto million. The project will probably have a long life, but the hospital typically assumes a five-year life in as capital budgeting analyses and then approximates the value o the cash flow beyond Year 5 by including a terminal, or salvage, value in the analysis. To estimate the terminal 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 milion excluding the land 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, ne discounts (including Medicare and Medicaid), and other allowances lower the net revenue amount to $1,000. The center would be open five days a week 50 weeks year, for a total of 250 days a year. Labor costs to run the surgery center are estimated at $800.000 per year, including fringe benefits. Supplies costs on average would run $400 per procedure, including anesthetics. Utilities, including hazardous waste disposat would add another $50,000 in annual costs of the surgery Center were built the hospitals cash overhead costs would increase by $36.000 annually primarily for housekeeping and buildings and grounds maintenance 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 ring 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 nomine that is wie RAS worn per , yeye OA were built the hospital's cash overhead costs would increase by $36.000 annually, primarily for housekeeping and buildings and grounds maintenance 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 Intiation. Furthermore, inflationary pressures have been highly variable. Because of the difficulties involved in forecasting Intation 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. The hospital's corporate cost of capitalis 10 percent When the project was mentioned briefly at the last meeting of the hospital's board of directors, several questions were raised. In particular, one director wanted to make sure that a risk analysis 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 but turned out to be a big money loser. They do not want a repeat of that occurrence Another director stated that she thought the hospital was putting too much faith in the numbers: "After she pointed out that 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 Apother director who also is the hospitals chief of medicine, expressed concern over the Impact of the ambulatory surgery center on the current volume of inpatient surgeries To develop the data rended for the risk (scenario) analysis, Jules Bergman, the hospital's director of capital budgeting, met with department heads of surgery, marketing, and facilities. After several sessions, they concluded that only two input variables are highly uncertain number of procedures per day and building equipment salvage value. If another entity entered the local ambulatory surgery market the number of procedures could be as low as 15 per day Converse acoptance is strong and no competing centers are buil, the number of procedures could be as high as 25 per day, compared to the most ikely value ct 20 per day. It real estate and medical equipment values stay strong, the building equipment Salvage value could be as high as 57 million, but the market weakens, the savage value could be as low as $3 million compared to an expected value of $5 million Jules also discussed the probabilities of the various scenarios with the medical and marketing staffs, and after a great deal of discussion reached a consensus of 70 percent for the most likely case and 15 percent each for the best and worst cases Assume that the hospital has hired you as a financial consultant. Your task is to conduct a complete project analysis on the ambulatorycorpery center and to present your findings and recommendations to the hospital's board of directors. To get you started, Tablet contains the cash flow analysis for the first three years te 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. Another director, mo also is the hospital's chief of medicine, expressed concern over the impact of the ambulatory surgery center on the current volume of inpatient surgeries, develop the data needed for the risk (scenario) analysis, Jules Bergman, the hospital's director of capitat budgeting, met with department heads of surgery, marketing, and facilities. Alter several sessions, they concluded that only two input variables are highly uncertain number of procedures per day and uilding equipment salvage value. If another entity entered the local ambulatory surgery market, the number of procedures could be as low as 15 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. If cal estate and medical equipment values stay strong, the building equipment salvage value could be as high as $7 milion, but if the market weakens, the salvage value could be as low as $3 million, compared to an expected value of $5 million Jules also discussed the probabilities of the various scenarios with the medical and marketing starts, and after a great deal of discussion reached a consensus of 70 percent for the most likely case and 15 percent each for the best and worst cases Assume that the hospital has hired you as a financial consultant. Your task is to cariduct a complete project analysis on the ambulatory surgery center and to present your findings and recommendations to the hospital's board of directors. To get you started, Table 1 contains the cash flow analysis for the first three years. Table 1 Partial Cash Flow Analysis 2 0 3500.000 (10.000.000) 55.000.000 100.000 50 000 2,000,000 3000 52.11000 55.150.000 124.000 51 500 2.000.000 37 ONO 521770 $5,304,500 348.720 63.045 2.121.000 892 52242745 CH This case is a great example of the complexity facing healthcare administration in the case, but rather the questions below: deciding how and where to use the precious capital. Do NOT answer the questions in 1. Will the ambulatory surgery center recoup their investment within the first 3 years? 2. What assumptions in this case exist, and which, if any are they struggling with? 3. Are there any safety or quality issues in this case that should be considered? 4. What is missing from this analysis? (Hint: last paragraph on page 2) What would you change about the case write up analysis to account for this possibility? 5. If you were in charge of deciding whether to move forward with this project, what would you decide? State the criteria you are using for your decision and apply the lessons from the course materials. Us CER SL Twin Falls Community Hospital is a 250-bed, not-for-profit hospital located in the city of Twin Falls, the largest city in Idaho's Magic Valley region and the seventh largest in the state. The hospital was founded in 1972 and today is acknowledged to be one of the leading healthcare providers in the area, Twin Falls' management is currently evaluating a proposed ambulatory (outpatient) surgery center. Over 80 percent 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 hours; minor procedures take about one hour or less, and major procedures take about two or more hours. About 60 percent of the procedures are performed under general anesthesia, 30 percent under local anesthesia, and 10 percent 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. This growth has been fueled 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. 3 - ut ht These factors have led to a situation in which the number of inpatient surgeries has grown little (if at all) in recent years while the number of outpatient procedures has been growing at over 10 percent annually and now totals about 22 million a year. Rapid growth in the number of outpatient surgeries has been accompanied by a corresponding growth in the number of outpatient surgical facilities. The number currently stands at about 5,000 nationwide, so competition in many areas has become intense. Somewhat surprisingly, there is no outpatient surgery center in the Twin Falls area, although there have been rumors that local physicians are exploring the feasibility of a physician-owned facility. The hospital currently owns a parcel of land that is a perfect location for the surgery center. The land was purchased five years ago for $350,000, 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 today's market the land would bring in $500,000, net of realtor commissions and fees. Land prices have been extremely volatile, so the hospital's standard procedure is to assume a salvage value equal to the current value of the land. 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. 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 terminal 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, excluding the land value. The expected volume at the surgery center is 20 procedures a day. The average charge per procedure is > A 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, insurer discounts (including Medicare and Medicaid), 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 $800,000 per year, including fringe benefits. Supplies costs, on average, would run $400 per procedure, including anesthetics. Utilities, including hazardous waste disposal, would add another $50,000 in annual costs. If the surgery center were built, the hospital's cash overhead costs would increase by $36,000 annually, primarily for housekeeping and buildings and grounds maintenance. 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. The hospital's corporate cost of capital is 10 percent When the project was mentioned briefly at the last meeting of the hospital's board of directors, several questions were raised. In particular, one director wanted to make sure that a risk analysis 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 but turned out to be a big money loser. They do not want a repeat of that occurrence. Another director stated that she thought the hospital was putting too much faith in the numbers: "After all," she le on the day care center We need to standardi morebout Another director stated that she thought the hospital was putting too much faith in the numbers: "After all," she pointed out, "that 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." Another director, who also is the hospital's chief of medicine, expressed concern over the impact of the ambulatory surgery center on the current volume of inpatient surgeries. To develop the data needed for the risk (scenario) analysis, Jules Bergman, the hospital's director of capital budgeting, met with department heads of surgery, marketing, and facilities. After several sessions, they concluded that only two input variables are highly uncertain: number of procedures per day and building equipment salvage value. If another entity entered the local ambulatory surgery market, the number of procedures could be as low as 15 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. If real estate and medical equipment values stay strong, the building/equipment salvage value could be as high as $7 million, but if the market weakens, the salvage value could be as low as $3 million, compared to an expected value of $5 million. Jules also discussed the probabilities of the various scenarios with the medical and marketing staffs, and after a great deal of discussion reached a consensus of 70 percent for the most likely case and 15 percent each for the best and worst cases. Assume that the hospital 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 hospital's board of directors. To get you started, Table 1 contains the cash flow analysis for the first three years. Table 1 OCdi ambuidory Surgery Hidiel, le number or procedures Coulu ve as low as per day. Conversely, if acceptance is strong and no competing centers are built, the number of procedures ould be as high as 25 per day, compared to the most likely value of 20 per day. If real estate and medical quipment values stay strong, the building/equipment salvage value could be as high as $7 million, but if the arket weakens, the salvage value could be as low as $3 million, compared to an expected value of $5 million. ules also discussed the probabilities of the various scenarios with the medical and marketing staffs, and after a Feat deal of discussion reached a consensus of 70 percent for the most likely case and 15 percent each for the est and worst cases. assume that the hospital has hired you as a financial consultant. Your task is to conduct a complete project malysis on the ambulatory surgery center and to present your findings and recommendations to the hospital's oard of directors. To get you started, Table 1 contains the cash flow analysis for the first three years. able 1 artial Cash Flow Analysis O 2 3 ($500,000) (10,000,000) $5,000,000 800,000 50.000 2,000,000 36,000 S2,114,000 $5,150,000 824.000 51,500 2,060,000 37,080 $2,177,420 $5,304,500 848,720 53,045 2.121,800 38,192 $2,242,743