Sunnyview Medical Center
As financial manager, my role at SMC is to oversee the production of financial reports, to direct investment activities and to implement cash management strategies (BLS.gov, 2011). Thus, I intend to improve the financial operations of the Sunnyview Medical Center with an eye to maximizing returns and working capital efficiency. In this capacity I will outline the strategy for dealing with the $231,000 in cash that the Center currently has on its balance sheet. Of this, $106,000 is excess and should be invested.
There are two CDs from which to choose, Metro and Westside. The basic difference between compounding and simple is that under compounding the interest rate is applied to the accumulated interest whereas under simple interest this is not the case. The formula for compounding is: P2 = P1 (1+r)^t.
The formula for simple interest is P2 = ((P1* r )* t) +
The full-term compound returns are as follows:
SMC
Principle
106,000
Year
Metro
106,000
112360
119101.6
126247.7
133822.6
Rate
0.06
0.06
0.06
0.06
0.06
Total
112360
119101.6
126247.7
133822.6
141851.9
Westside
106,000
112625
119664.1
127143.1
135089.5
Rate
0.0625
0.0625
0.0625
0.0625
0.0625
Total
112625
119664.1
127143.1
135089.5
143532.6
The full-term simple returns are as follows:
SMC
Principle
106,000
Year
1
2
3
4
5
Metro
106,000
106000
106000
106000
106000
Rate
0.06
0.06
0.06
0.06
0.06
Total
137,800
Westside
106,000
106,000
106,000
106,000
106,000
Rate
0.0625
0.0625
0.0625
0.0625
0.0625
Total
139,125
The returns for early withdrawals under compounding are as follows:
SMC
Principle
106,000
Year
1
2
3
4
5
Metro
106,000
109180
114099.1
120963.6
130075.1
Rate
0.03
0.0375
0.045
0.0525
0.06
Total
109180
114099.1
120963.6
130075.1
141851.9
Westside
106,000
109,445
114,650
121,834
131,315
Rate
0.0325
0.04
0.0475
0.055
0.0625
Total
109445
114649.6
121833.8
131315.4
143532.6
The returns for early withdrawals under simple interest are as follows:
SMC
Principle
106,000
Year
1
2
3
4
5
Metro
106,000
109180
113950
120310
128260
Rate
0.03
0.0375
0.045
0.0525
0.06
Total
109180
113950
120310
128260
137800
Westside
106,000
109,445
114,480
121,105
129,320
Rate
0.0325
0.04
0.0475
0.055
0.0625
Total
109445
114480
121105
129320
139125
Westside Savings is superior in all instances, because the CD it offers is a quarter point ahead of Metro's in all instances. But these calculations are important for understanding the risks associated with early withdrawal when the rates are competitive among the two firms.
3. Risk contracting is undertaken when the hospital contracts out some of the risk it faces with respect to Medicare payments. The HMO faces risk associated with the payment rates for specific services, and the risk that Medicare recipients will congregate in those areas with higher payouts. This risk has fluctuated since its inception, with the need to contract that risk fluctuating alongside it (Hurley, Grossman & Strunk, 2003). Any risk contract is going to create financial incentives. What is important is that the financial incentives are to meet the organization's profitability goals. Efficiency of care is one way to improve profitability -- when the contract focuses on measures that encourage greater efficiency, it will drive improved profitability.
One of the downsides to risk sharing is that it encourages clinics to avoid patients requiring substantial care -- this is another means by which profitability can be improved. This has in the past resulted in consumer backlash against the practice. However, the risk-sharing partner (insurance company) will often avoid contracts that see it deliver unreasonable payments to the HMO. What we can expect are contracts that deliver us a relatively slim margin. This should encourage us to find ways to reduce costs, either through improved patient throughput, use of generic drugs, use of more efficient procedures and increasing the productivity of our staff, our equipment and our facilities capacity.
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