Some hospitals create a "contingency" budget, which can be offset by a few of these patients.
The percentage of non-paying patients can vary a good deal, particularly in a city- or county-owned hospital. This number may not vary, and typically in a budget the hospital CEO and/or CFO negotiates with the governmental bodies for regular subsidies to cover.
The billing cycles can be difficult to predict, particularly for Medicare and Medicaid patients, where there are famous irregular delays on payment. It is possible, as noted above, to go to outside banks or other bodies to get a/R funding to cover these contingencies
Particularly in older hospitals, the amount in the depreciation account may not be enough to cover unforeseen expenses, such as asbestos removal or deterioration. Hospitals can address this by auditing their depreciation accounts and making a better assessment of what might be needed in coming budgets.
Many organizations use a leveraged buyout vs. A merger or other type of acquisition strategy. Compare and contrast the different "purchasing" methods. Which is the best? Does one work better in a different situation than another? Explain your rationale.
An LBO must have good cash flow to cover the cost of the debt. Most LBO houses look for a 4-6-year coverage of the debt, i.e. they count on free cash flow (generally EBIT-DA) to pay back the borrowed amount in 4-6 years. Although the LBO house might make a lot of money on equity appreciation, it is debt coverage that is most important to them, and the equity appreciation is seen as a lagniappe.
Sale and leaseback makes sense if the hospital is not-for-profit, as the tax benefits accrue to the commercial buyers, and would not be used by the hospital itself.
Merger makes sense if a consolidation is needed. If two hospitals are in a price war, combining operations helps them to increase prices and negotiating leverage with PPO's and HMO's in their area. It also helps if there are redundant costs -- combining two hospitals' coronary units may result in focus in both institutions, perhaps one in surgery and the other in intervention.
Outright acquisition makes sense if there is a dominant hospital which would like to either (1) tie in referring physicians who are attached to the satellite hospital, or (2) the hospital would like to increase its bargaining power with the payors.
The cynicism of a doctor showed when he said, "When you've seen one joint venture, you've seen one joint venture." What did the doctor mean by the comment? Compare and contrast different options as alternatives to mergers and acquisitions.
Joint ventures are difficult for doctors and other health care professionals because the rules developed in one hospital may be different than those in another hospital. JV's make sense because they can combine and consolidate services; unfortunately, there is generally a loser and a winner in such combinations. As an example, if two hospitals come together in a pediatric venture, one of the hospitals may have to give up its own pediatric department in the interest of building expertise and specialized plant. Of course, each hospital's staff will argue that "their" pediatric wing is better, or should stay open for some service reason.
Since hospitals are generally run like universities -- that is, they depend on the assent of a lot of highly-trained and independent contributors -- it is difficult to get doctors' acceptance of any major change. This is certainly true for joint ventures, but also for other kinds of major change as well.
As the Chief Financial Officer for your hospital, you are charged with evaluating the latest managed care and capitation contracts. Explain the process in detail on how to evaluate the different contracts.
Managed care and capitated contracts are fundamentally different. A managed care agreement can be fee-for-service or capitated, and combines a number of payment sources (in addition to the payment by a third party), such as Medicare (Schneider).
A capitated contract is similar to an HMO. In that case the hospital receives a fixed income from the number of "heads" in the capitated group. The more it costs to treat those patients for illness, the less money the hospital makes. A few patients with significant preconditions, such as recurring cancer, Congestive Heart Failure or Type I diabetes, can skew the whole population and make it unprofitable. On the other hand, doctors like capitated agreements because it is possible to put in place preventative care measures (such as pre-natal screening) which can improve patient outcomes and reduce overall costs.
Managed care contracts, on the other hand, are closer to fee-for-service agreements, following a cost-per-procedure model. If the target population has a lot of long-term care for chronic diseases, which tends to have a low reimbursement-to-cost ratio, it can be very unattractive to a hospital. if, on the other hand, the population has a high number of high-profit procedures, then it can be very attractive (Shah).
In both cases, the CFO must understand and predict the costs and cash flow attendant on each opportunity.
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Mullins, D.W. "Financial Leverage, the Capital Asset Pricing Model and the Cost of Equity Capital." Harvard Business Review (1980): n.p.
Schneider, EC, Zaslavsky, AM and Epstein, AM. "Use of High-Cost Operative Procedures by Medicare Beneficiaries Enrolled in for-Profit and Not-for-Profit Health Plans." NEJM (2004): 143-150.
Shah, BR, Glickman, SW, Lian, L, Gibler, WB, Ohman, EM, Pollack, CV, Roe, MT and Peterson, ED. "The Impact of for-Profit Hospital Status on the Care and Outcomes of Patients With Non-ST-Segment Elevation Myocardial Infarction." JACC (2007): 1462-1468.
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