Assignment Exercise 183: Benchmarking

Required 1. Select an organization: either from the Case Studies in Chapters 2728 or from one of the Mini-Case Studies in Chapters 2931. 2. Prepare a list of measures that could be benchmarked for this organization. Comment on why these items are important for benchmarking purposes. 3. Find another example of benchmarking for a healthcare organization. The example can be an organization report or it can be taken from a published source such as a journal article.

CHAPTER 29 Mini-Case Study 1: Proposal to Add a Retail Pharmacy to a Hospital in the Metropolis Health System

Sample General Hospital belongs to the Metropolis Health System. The new chief financial officer (CFO) at Sample Hospital has been attempting to find new sources of badly needed revenue for the facility. Consequently, the CFO is preparing a proposal to add a retail pharmacy within the hospital itself. If the proposal is accepted, this would generate a new revenue stream. The CFO has prepared four exhibits, all of which appear at the end of this case study. Exhibit 291, a three-year retail pharmacy profitability analysis, is the primary document. It is supported by Exhibit 292, the retail pharmacy proposal assumptions. The profitability analysis is further supported by Exhibit 293, a year 1 monthly income statement detail. Finally, Exhibit 294 presents the supporting year 1 monthly cash flow detail and assumptions.

When the controller reviewed the exhibits, she asked how the working capital of $49,789 was derived. The CFO explained that it represents 3 months of departmental expense. He also explained that the cost of drugs purchased for the first 60 days was offset by these purchases accounts payable cycle, so the net effect was 0. In essence, the vendors were financing the drug purchases. Thus, the working capital reconciled as follows:

Working Capital:

Cost of drugs (2 months)

$303,400

Vendor financing (accounts payable)

($303,400)

Departmental expense (3 months)

$49,789

Total Working Capital Required

$49,789

The controller also noticed on Exhibit 294 that the cost of renovations to the building is estimated at $80,000 and equipment purchases are estimated at $50,000 for a total capital expenditure of $130,000. The building renovations are depreciated on a straight-line basis over a useful life of 15 years, whereas the equipment purchases are depreciated on a straight-line basis over a useful life of 5 years. The required capital is proposed to be obtained from hospital sources, and no borrowing would be necessary. In addition, the total capital expenditure is projected to be retrieved through operating cash flows before the end of year 1. Exhibit 291 Sample General Hospital 3-Year Retail Pharmacy Profitability Analysis

Year 1

Year 2

Year 3

Rx Sales

2,587,613

2,692,152

2,828,375

Cost of Goods Sold

2,047,950

2,088,909

2,151,576

Gross Margin

539,663

603,243

676,799

GM %

20.9%

22.4%

23.9%

EXPENSES

Salaries and Wages

192,000

197,760

203,693

Benefits

38,400

39,552

40,739

Materials and Supplies

12,000

14,400

17,280

Contract Services and Fees

14,400

17,280

20,736

Depreciation and Amortization

15,333

15,333

15,333

Interest

Provision for Bad Debts

25,876

26,922

28,284

Misc. Exp.

3,600

4,320

5,184

Total Expense

301,609

315,567

331,248

Net Income

238,053

287,676

345,550

Operating Margin

9.2%

10.7%

12.2%

Cash Flow

Year 1

Year 2

Year 3

Sources

Net Income

238,053

287,676

345,550

Depreciation

15,333

15,333

15,333

Borrowing

Total Sources

253,386

303,010

360,884

Uses

Capital Purchasing

130,000

Working Capital

49,789

Total Uses

179,789

Cash at Beginning of Period

73,597

376,607

Net Cash Activities

73,597

303,010

360,884

Cash at Ending of Period

73,597

376,607

737,490

Volume

Year 1

Year 2

Year 3

Number of Prescriptions Sold

55,350

56,457

58,151

Courtesy of Resource Group, Ltd., Dallas, Texas. Exhibit 292 Sample General Hospital Retail Pharmacy Proposal Assumptions

Prescriptions

1.

Annual Prescription EstimatesRate of Growth/Capture

Per Day

Annual

Year 1

225

55,350

Year 2

2.0%

230

56,457

Year 3

3.0%

236

58,151

2.

Average Net Revenue per PrescriptionYearly Increases

Year 1

$ 46.75

Year 2

2.0%

$ 47.69

Year 3

2.0%

$ 48.64

3.

Bad Debt Percentage

1.0%

4.

Average Cost per PrescriptionYearly Increases

Year 1

$ 37.00

Year 2

3.0%

$ 38.11

Year 3

3.0%

$ 39.25

5.

Inflation RatesPer Year

Salary and Wages

3.0%

Other Than Prescriptions

2.0%

Benefits as a % of Salaries

20.0%

6.

Initial Capital Requirements

Building

80,000

Equipment

50,000

Working Capital

49,789

Total

179,789

Year 1

Year 2

Year 3

Gross Margin

539,663

603,243

676,799

Net Income before Taxes

238,053

287,676

345,550

Year 1

Year 2

Year 3

Beginning Cash Balance

73,597

376,607

Net Cash Activity

73,597

303,010

360,884

Ending Cash Balance

73,597

376,607

737,490