Holiday Hospital has seen a competitor, Grinch General, rapidly grow services in the area. In order to expand services to stay competitive, leadership is considering building a new outpatient wing for expanded specialty services with a sizeable cash investment.

Expect revenue with $90,000$ visits

Payer $\%$ of Volume $($Payer Mix$)$ Net Revenue Per Visit $90,000$

Medicaid $35\%$ $ $130$ $ $4,095,000$

Medicare $25\%$ $ $200$ $ $4,500,000$

Commercial $20\%$ $ $250$ $ $4,500,000$

Managed Care $20\%$ $ $190$ $ $3,420,000$

Total $100\%$ $ $770$ $ $16,515,000$

$1.$ If the following is also true, in what year will the hospital break even on its investment, including discounting for future cash flow? Show all work.

Conditions:

$-$ Capital Costs: $$20,000,000$

$-$ Annual Visits Expected: $90,000$

$-$ Discount$/$Interest Value: $9\%$

$-$ Net Revenue per Visit: Calculate from Payer Mix Table

$-$ Variable Costs Per Visit: $$110$

$-$ Annual Fixed Costs: $$400,000$

Hint: You should prepare an NPV analysis and assume no inflation for revenue or costs. To know which year will break even, you should have the NPV of cash flow greater than or equal to the capital investment. The table below may help you frame your calculations $$ you may need to calculate more than $3$ years for your payoff.

P&L Category Year $1$ Year $2$ Year $3...$

Net Patient Services Revenue Net Revenue per Visit x Visits $=$ Year $1=$ Year $1$

Variable Costs Variable Cost per Visit x Visits $=$ Year $1=$ Year $1$

Fixed Costs Fixed Costs $=$ Year $1=$ Year $1$

Annual Profit $($Cash Flow$)$ Net Revenue Less Costs $=$ Year $1=$ Year $1$

Net Present Value Annual Profit

$(1$ Year Discount$)$ Annual Profit

$(2$ Year Discount$)$ Annual Profit

$(3$ Year Discount$)$

A$.$ Calculate the IRR $\%$ for the first $5$ years of your business plan. Based on the opportunity cost, is the investment good or bad? Would this change if the interest rate was $11\%$ instead of $9\%?$ Justify your answer.

B$.$ After thinking through expansion of outpatient services, you feel the model created in $(1)$ may not take into account all of the conditions that could impact cash flow. Provide an explanation of $2$ things the model does not consider and if the payoff would improve or get worse if those considerations were included.

$2.$ If Laboratory and Radiology volume and margins are split $60/40$ between Inpatient and Outpatient respectively, does Inpatient or Outpatient generate more direct profit? Defend your answer with calculations. Use the tables below to answer the question.

Department Net Revenue Total Variable Direct Costs Total Fixed Direct Costs Total Net Profit

Inpatient Care $ $43,750,000$ $ $16,080,000$ $ $600,000$ $ $27,070,000$

Routine Outpatient Care $ $28,105,000$ $ $9,390,000$ $ $250,000$ $ $18,465,000$

Specialty Outpatient Care $ $19,635,000$ $ $4,620,000$ $ $300,000$ $ $14,715,000$

Laboratory $ $5,550,000$ $ $2,900,000$ $ $250,000$ $ $2,400,000$

Radiology $ $9,396,000$ $ $4,490,000$ $ $130,000$ $ $4,776,000$

Total Direct $ $106,436,000$ $ $37,480,000$ $ $1,530,000$ $ $67,426,000$

Before Overhead

Overhead Costs $ $18,334,500\mathrm{.}0$

Total Net Profit $ $49,091,500$

Volume and budget basis

Department Department Budget Basis Annual Volume

Inpatient Care Discharges $2,500$

Routine Outpatient Care Visits $146,000$

Specialty Outpatient Care Visits $66,000$

Laboratory Tests $185,000$

Radiology Tests $27,000$

$3.$ If overhead costs stay flat $($same as Table A total$),$ what would be the percent change in Holiday Hospital$$s operating margin from the current profit to the forecasted profit from $3?($Use the tables below to answer the questions$).$

Hint: Take total direct profit sum from $(3)$ and subtract total overhead costs for forecasted profit. Percent change in operating margin should come from difference between this forecasted profit and the answer to $(2).$

Department Baseline Volume $($from Table A$)$ Volume with Growth Net Revenue Per Volume Total Net Revenue Variable Cost Per Volume Total Variable Costs $=$ New Volume $*$ Var Cost Per Volume Total Fixed Costs Total Direct Costs Total Direct Profit

$=$ Baseline x Growth $($Adjusted for inflation$)=$ New Volume $*$ Net Revenue Per Volume $($Adjusted for inflation$)$

Inpatient Care $2,50075$