You are the CFO of a Hospital. Suppose that your projected average daily reimbursement is $100, 000 and your average collection day is 40 days. What is your hospital's annual cost of carrying receivables at 4% interest for the first 7 months of the year and 5.5% for the other 5 months?
A) 160,000
B) 175,000
C) 185,000
D) 195,000
E) 145,000
F) 201,000
G) 177,000
H) 155,500
I) None of the listed
2. Suppose your clinic's financial projections for the first year of operations are as follows:
Number of visits $10,000
Wages and benefits $220,000
Rent $5,000
Depreciation $30,000
Utilities $2,500
Medical Supplies $50,000
Administrative supplies $10,000
Assume that all costs are fixed except supplies costs, which are variable. What is your clinic's variable cost rate?
A) 3
B) 4
C) 5
D) 6
E) 7
F) 8
G) 9
H) 10
3. You decide to go into consulting. One of your clients, a CFO of a non-for-profit hospital asks your opinion about the acquisition of a local physician practice for $2,000,000. After the acquisition, the CFO expects to be reimbursed under APC and to pay out physicians (Salary expense) under RBRVS. The CFO also expects to spend on average $250,000/year in other expenses. Over the next 5 years, RBRVS and APC weights are expected to remain the same. Also the conversion factor for RBRVS is expected to remain at $34.0376 and the APC conversion factor is expected to remain $70.016. The number of visits will also likely behave the same. Here are the statistics of the physician practice from 2008-20012:
|
CPT/
HCPCS
|
Number of visits 2008
|
Number of visits 2009
|
Number of visits 2010
|
Number of visits 2011
|
Number of visits 2012
|
|
Q0035
|
199
|
87
|
77
|
213
|
243
|
|
G0416
|
58
|
191
|
206
|
69
|
151
|
|
78483
|
199
|
66
|
223
|
250
|
120
|
|
78491
|
238
|
181
|
91
|
169
|
52
|
|
36475
|
125
|
205
|
155
|
88
|
210
|
|
36515
|
245
|
174
|
89
|
172
|
51
|
|
38542
|
190
|
96
|
141
|
140
|
176
|
|
CPT/
HCPCS
|
Physi-
cian
Work
RVUs
|
Non-
Facility
PE
RVUs
|
Facility
PE
RVUs
|
Mal-
Practice
RVUs
|
Global
|
APC Relative Weight
|
|
Q0035
|
0.17
|
0.36
|
NA
|
0.01
|
XXX
|
2.5453
|
|
G0416
|
3.09
|
13.96
|
NA
|
0.01
|
XXX
|
2.3474
|
|
78483
|
1.47
|
7.06
|
NA
|
0.03
|
XXX
|
4.2502
|
|
78491
|
1.50
|
0.65
|
0.65
|
0.10
|
XXX
|
14.8102
|
|
36475
|
6.72
|
46.52
|
2.74
|
1.41
|
000
|
44.1803
|
|
36515
|
1.74
|
55.40
|
0.78
|
0.24
|
000
|
32.5877
|
|
38542
|
7.95
|
NA
|
6.03
|
1.33
|
090
|
51.3327
|
1. Show an expected P&L statement (on average).
2. What is the operating margin?
3. What is the expected profit per visit adjusted to wage index and case mix index?
4. Should the CFO acquire the physician practice given the opportunity cost rate of 10%? Justify your answer from NPV, IRR, and other relevant financial measures.
5. What other considerations should the CFO consider before making the final decision?
You are contemplating the possibility of starting a new business. After weighting different options, you decide to start a company that releases patient medical records (health information).
Current analysis
You will need about $150,000 in start-up costs but you can only borrow half of that amount from your family's home equity (at 13% interest). You will have to borrow the rest of the needed capital from a local community bank at 10%. Suppose you decide to take out a 5 year loan. Here is the amortization schedule:
|
Date
|
Interest
|
Principal
|
Balance
|
|
Year 1
|
$13,904.46
|
$24,340.22
|
$125,659.78
|
|
Year 2
|
$11,355.72
|
$26,888.96
|
$98,770.83
|
|
Year 3
|
$8,540.10
|
$29,704.58
|
$69,066.24
|
|
Year 4
|
$5,429.64
|
$32,815.04
|
$36,251.20
|
|
Year 5
|
$1,993.48
|
$36,251.20
|
$0.00
|
1. You are the CFO of a Hospital. Suppose that your projected average daily reimbursement is $100, 000 and your average collection day is 40 days. What is your hospital's annual cost of carrying receivables at 4% interest for the first 7 months of the year and 5.5% for the other 5 months?
A) 160,000
B) 175,000
C) 185,000
D) 195,000
E) 145,000
F) 201,000
G) 177,000
H) 155,500
I) None of the listed
2. Suppose your clinic's financial projections for the first year of operations are as follows:
Number of visits $10,000
Wages and benefits $220,000
Rent $5,000
Depreciation $30,000
Utilities $2,500
Medical Supplies $50,000
Administrative supplies $10,000
Assume that all costs are fixed except supplies costs, which are variable. What is your clinic's variable cost rate?
A) 3
B) 4
C) 5
D) 6
E) 7
F) 8
G) 9
H) 10
3. You decide to go into consulting. One of your clients, a CFO of a non-for-profit hospital asks your opinion about the acquisition of a local physician practice for $2,000,000. After the acquisition, the CFO expects to be reimbursed under APC and to pay out physicians (Salary expense) under RBRVS. The CFO also expects to spend on average $250,000/year in other expenses. Over the next 5 years, RBRVS and APC weights are expected to remain the same. Also the conversion factor for RBRVS is expected to remain at $34.0376 and the APC conversion factor is expected to remain $70.016. The number of visits will also likely behave the same. Here are the statistics of the physician practice from 2008-20012:
CPT/
HCPCS Number of visits 2008 Number of visits 2009 Number of visits 2010 Number of visits 2011 Number of visits 2012
Q0035 199 87 77 213 243
G0416 58 191 206 69 151
78483 199 66 223 250 120
78491 238 181 91 169 52
36475 125 205 155 88 210
36515 245 174 89 172 51
38542 190 96 141 140 176
RVUs Global APC Relative Weight
Q0035 0.17 0.36 NA 0.01 XXX 2.5453
G0416 3.09 13.96 NA 0.01 XXX 2.3474
78483 1.47 7.06 NA 0.03 XXX 4.2502
78491 1.50 0.65 0.65 0.10 XXX 14.8102
36475 6.72 46.52 2.74 1.41 000 44.1803
36515 1.74 55.40 0.78 0.24 000 32.5877
38542 7.95 NA 6.03 1.33 090 51.3327
1. Show an expected P&L statement (on average).
2. What is the operating margin?
3. What is the expected profit per visit adjusted to wage index and case mix index?
4. Should the CFO acquire the physician practice given the opportunity cost rate of 10%? Justify your answer from NPV, IRR, and other relevant financial measures.
5. What other considerations should the CFO consider before making the final decision?
You are contemplating the possibility of starting a new business. After weighting different options, you decide to start a company that releases patient medical records (health information).
Current analysis
You will need about $150,000 in start-up costs but you can only borrow half of that amount from your family's home equity (at 13% interest). You will have to borrow the rest of the needed capital from a local community bank at 10%. Suppose you decide to take out a 5 year loan. Here is the amortization schedule:
Date Interest Principal Balance
Year 1 $13,904.46 $24,340.22 $125,659.78
Year 2 $11,355.72 $26,888.96 $98,770.83
Year 3 $8,540.10 $29,704.58 $69,066.24
Year 4 $5,429.64 $32,815.04 $36,251.20
Year 5 $1,993.48 $36,251.20 $0.00
Your estimated revenue per page of a medical record is 75 cents. The estimated processing cost per page is 20 cents
Marketing is expected to cost you $2,000 per year. So far, you only have two clients (two local hospitals) with combined annual discharges of 30,000. From your marketing efforts and word- of-mouth, you expect to gain 5,000 new discharges each year over the next 5 years.
On average, you expect to release10 pages per discharge. You plan to pay yourself $85, 000 per year. You plan to hire a part-time clerk for every 15,000 discharges at $20,000 per year. You expect to pay $10,000 per year in equipment lease. For the next 5 years, your revenue and expenses are expected to increase by 3%, except the marketing costs (in other words, marketing will remain at $2,000 per year) Your tax rate is expected to stay at 35%
Questions
1. What is your corporate cost of capital (CCC) on the day you start your business?
2. Construct a projected P&L statement in each year for next 5 years.
3. Construct a simple balance sheet statement in each year for next 5 years. Remember that Assets = Equity + Liabilities
4. Discuss about the Dupont equation of your company.
5. What other financial measures can investors use to evaluate the profitability of your company?