Congratulations, you have just been appointed as director of the radiology department at High Quality Hospital (HQH). Your hospital is known for outstanding service and has earned many quality awards. On your first day as director you read the Hospitals strategic plan. You find that osteoarthritis (weakening of the bones) is increasing in your primary service area for both men and women. As you assess the radiology equipment in your department, you realize that the hospital does not have the equipment to measure bone density.

Over the next 2 weeks, you research and develop a business plan to make the case for the Hospital to buy a dexa scan (equipment to measure bone density and the degree of osteoarthritis, if any). A part of the business plan is a 5 year projection of the profitability of buying a dexa scan.

First, In order to determine the potential volume of patients, you contract with New Solutions (NS) a New Brunswick company specializing in hospital demographic data. NS determines that the hospital could see as many as 700 patents in a year after 5 years of operating the dexa scan service. Given the time it takes to grow a new service, it is most likely that only 80% could be achieved after the initial 5 years. However, in the start up year it is expected that the most patient volume could be is 250 patients. You will need to estimate your volume growth for each year subsequent year. The population trends for the next 5 years show no change in the overall population. However, the population is aging and osteoarthritis is usually diagnosed in a persons late 40s to early 50s. This is the only demographic that is growing and is project to increase by 15% over the next 5 years.

Since there is no payer data to determine the volume by payer, the departments actual payer mix will be assumed for the dexa scan service. The current payer mix is as follows: Medicare 25%, Medicaid 10%, Horizon 20%, United 25%, Aetna 10%, CIGNA 5%, Self-pay/Charity are 5%.

There are 2 dexa scan tests with CPT billing codes that are used by hospitals and radiology centers as follows:

1. CPT code #77081 DXA Bone Density/Peripheral which groups to APC #05521 and pays $73.00 per scan by Medicare.
2. CPT code #77080 DXA Bone Density/Axial which groups to APC #05522 and pays $135.00

In speaking with other hospitals, their volume averages 50% CPT code #77081 and 50% CPT code #77080. The other payers pay as follows as a percentage of Medicare. Horizon pays 6.0 times Medicare rates, Medicaid pays 80% of Medicare rates, United pays 5 .5 times Medicare rates, Aetna pays 6.5 times Medicare rates, and CIGNA pays 6.5 times Medicare rates. Self-pay/Charity care patients are billed charges but cash collections on these patients averages 25% of Medicare rates. Most patients have co-pays or co-insurance. Many patients pay their co-pays and co-insurance but about 1% of all revenue earned is not collected from patients and therefore become bad debt.

The dexa scan equipment lists for $155,000 by HOLOGiC (the best manufacture for this type of equipment), but since HQH participates in a Group Purchasing Organization (GPO) the GPO discounted price is $52,000. The manufacturer is also a reprocessing center of used equipment and can offer a used but refurbished dexa scan that is 3 years old for $18,000. The American Hospital Association (AHA) useful life of a new dexa scan is 7 years. If you are given approval to implement the dexa scan service it will start on January 1.

The dexa scan service needs a technologist full time (full time employees at HQH work 2080 hours per year) and the current market rate for the employee is $45,000 plus benefits. HQHs benefit percentage is 25% of salary and is expected to maintain that percentage for the next several years. Because of the Human Resources (HR) policies, the department will also need a part time equivalent technologists for coverage when the full time employee is taking vacation, holiday and sick time. So the annual staffing plan needs to be at least 1.12 FTEs (Full time Equivalent) employees. Most of the radiology services at HQH have their technologists certified in their specialty and pay an extra $1.00 per hour once the employee is certified. HQH also pay $2,500 (one time) for the education course to become certified. Since inflation is at historical lows, annual employee raises have averaged 2% per year and the economic outlook does not expect to see that change for the next few years.

During your research and in discussion with other hospitals running a dexa scan service determined the following other costs are needed to run the service as follows:

1. Office supplies run about $25 per scan
2. Maintenance cost average about 7% of the original purchase price of the equipment after the one year warranty period. Maintenance increases average 1.5% per year after the warranty period. A warranty period is only available on new equipment.
3. A dexa scan uses a high level of electricity and runs about $2.75 per scan
4. Most hospitals incur about $3,000 per year for education programs to keep the staff updated on the latest innovations in dexa scan technology.

Given the facts as described about, you are to prepare a 5 year projection (budget) of the revenue and expenses (Statement of Operations) of a dexa scan service at HGH. A dexa scan requires a physician (Radiologist) to interpret each dexa scan. For purposes of the assignment you will not need to determine the revenue nor expenses of the physician portion of a dexa scan service. You have the following requirements to complete this assignment as follows:

1. Prepare the 5 year projection of revenue and expenses and corresponding profit or loss. You should also include at the bottom of each year the total volume estimated on an excel spreadsheet. (Excel document)
2. Prepare a supporting schedule on an excel spreadsheet of the calculations to determine net patient service revenue for each of the 5 years. this will include the volume by payer by each type of scan. The total of all revenue by all payers for each year needs to be summarized and ties back to the revenue on the (Excel document)