Project Overview
The project involves construction of an ASC to offer special operating services to a specific patient group. The project anticipates recovering from bad debts by realizing profits within three years of launching.
Background
Various specialties will use the ASC, including gastroenterology, orthopedics, urology, and charity care. Each specialty has its unique procedure description, APC Code, APC description, and ASC charge. It is believed that the services rendered by the specialties will generate adequate operational revenues to ensure that the project is feasible in the three-year duration ( Moro Visconti, 2013) . The five procedures outlined for each specialty is projected to produce sufficient revenues to cover the bad debt incurred in the operations. Accommodating the expected growth requires about 18 operating rooms to be occupied by the staffs interacting either directly or indirectly with the patients.
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Financials
Revenues
Net revenue from the project is expected to be $7,221,793, $8,011,272, and $8,890,253 in 2020, 2021, and 2022, respectively. Revenue percentage is projected at $2,166,538, $2,403,382, and 2,666,076 in 2020, 2021, and 2022, respectively. Finally, the capitated shared savings will be $43,331, $48,068, and $53,342 in 2020, 2021, and 2022, respectively. Between 2020 and 2022, revenue has been on the rise, with the operating margin increasing from 16.30 to 2.82 between 2020 and 2022, respectively. Total margin has also increased steadily for the three years. Comparison of the operating margin and total margin, with the benchmark indicates that the project is good. However, the assessment of the Debt Service Coverage Ratio for all the years, in comparison with the benchmark (4.30), indicates that the project performance is not good. However, the “not good” conclusion relates to the fact that the Debt Service Coverage Ratio only reflects the ratio created by the ASC, not the entire revenue from the hospital.
Personnel expenses, including staffing plan or model
For 2020, the total salaries including the benefits will be $1,880,981, $2,063,799 in 2021, and $2,268,910. The staffing model involves 1 Pre-Op nurse assigned 1 or 2 beds, 1 nurse assigned to one Operating Room (OR), 2 medical assistants or operating technician assigned to one OR, 0.6 instrument technician assigned to one OR, and one Post Operating nurse to one 2-Post bed. With the number of beds clearly highlighted, the staffing plan will involve 18 clinical staff and 6 administrative staff (3 admin staff who interact with patients, 1 admin staff who does not interact with patients, 1 admin manager, and 1 clinical nurse manager).
Other expenses
Other expenses include total drugs & supply expenses, general & administrative expenses, facilities & equipment expenses, and overhead other expenses, for 2020, 2021, and 2022, other expenses were $3,043,463, $3,382,293, and $3,762,046, respectively. Other expenses have been increasing steadily for the three years.
Equipment needs
Group under fixed expenses, equipment expenses have remained slightly steady for the three years, with a significant change occurring between 2021 and 2022. Nonetheless, the expenses were $280,000 in 2020, $288,400 in 2021, and $297,052.
Required capital
The required capital should cater for assets including Post Operating beds equipment, operating room equipment, pre-operating beds equipment, interior space buildout, office furniture, and building construction. The start-up cash requirement covers areas including one month benefits and salaries expenses and one month supply and drug expenses. Considering all the asset units or quantities required for the project, the aggregate capital required is $11,024,079 ($10,722,000 in asset financing and $302,079 in start-up cash needs).
Financing decision and options
Three financing decisions are available to fund the project: Option A (50% equity and 50% loan), Option B (Loan financing), and Option C (Public Bond – A Rating). The present values for the options are $5,500,000 for Option A, $11,000,000 for Option B, and $11,000,000 for Option C. An assessment of the financing options indicates that Option A has the most favorable total annual payment of $460,716.19. Option B has the highest annual payment. Although the interest payment is highest for the first option, it is always appropriate to put 50% of the funds into equity instead of having a loan without any form of equity. Option C has the longest term, with the highest interest rate. However, although the monthly payments tend to be cheaper because of the extended payment term, the organization would be paying for longer period ( Onwujekwe, Onoka, Nwakoby, Ichoku, Uzochukwu, & Wang, 2018) .
Profits
The profits, displayed as operating income in the statements of operations indicate a consistent increase over the three-year duration. In 2020, the profits are projected to be $1,184,186, $1,430,633 in 2021, and $1,861,747. The steady increase in profits reflects the increase in operating expenses for the three years. The difference in operating profit between 2020 and 2022 will be $677,560.
Ratio and variance analysis
Computation of the variance for all the important elements of the statements of operations produces positive ratios. In revenues, for instance, the variance between 2020 and 2022 is 23%. Expenses reported a variance of 21%, while the operating income or profit is 57%. The important ratios that can be used in the feasibility assessment of the project are operating margin, total margin, and debt service coverage ratio. The operational ratio analysis include the number of staffs ORs (4.0 in 2020, 4.5 in 2021, and 4.50 in 2022) and number of surgical cases (5,225 in 2020, 5,748 in 2021, and 6,322 in 2022).
Moving Forward
From the analysis of the two relevant profitability ratios, the project seems good and exceeds the benchmarks. The projection seems low, specifically for the DSCR benchmark. However, the benchmark does not entail any cash for the hospital, indicating that the project still looks good. The operational ratios highlight a 10% increase in volume year-over-year in the number of cases and ORs. The benefit and salary expenditure relative to the revenue is on target. When the expenses are divided by the number of cases or ORs, the result exceeds the benchmark, meaning that the figure is not good ( Mbithi & Okiro, 2018) . In this regard, the center should reconsider lessening the expenses on personnel or increasing the case load per OR by extending OR hours to about 6.5-7 hours. The increase in the case load, however, should not involve an increase in the number of staff. Reducing administrative staff is also included in the two metrics described above; hence, limiting the number of admin staff also reflects to meeting the outlined benchmark.
The analysis performed to determine the NPV highlight that the project does not indicate evidence of profitability. In fact, the project still has $4.5 million deficit at the end of the first three years. Analysis of the Payback period, however, demonstrates that the project regains its original/initial investment after 4.49 years. Because the useful life of the building is 30 years, and the equipment has seven years useful life, it is better to proceed with the project.
References
Mbithi, P., & Okiro, K. (2018). Determinants of Private Finance Initiative for Project Financing; A Study of National Road Construction Projects in Kenya. African Development Finance Journal (ADFJ) , 2 (1).
Moro Visconti, R. (2013). Managing healthcare project financing investments: a corporate finance perspective. Journal of Investment and Management , 2 (1), 10-22.
Onwujekwe, O., Onoka, C., Nwakoby, I., Ichoku, H., Uzochukwu, B., & Wang, H. (2018). Examining the financial feasibility of using a new special health fund to provide universal coverage for a basic Maternal and Child Health benefit package in Nigeria. Frontiers in public health , 6 .
