1. PALMS HOSPITAL Traditional Project Analysis
HCA 515
Fall 2014
Chetan Gujarathi
Nihal Kabre
Maria Khalid
Krupali Joshi
Marie-Dianne Sauco

2. Palms hospital case
250 bed, investor owned hospital located in Islamorada, Florida.
Founded in 1946 by Rob Winslow a prominent Florida physician.
Palms Hospital Management considering expansion into an outpatient surgery center - first mover advantage.
Project risk analysis conducted:
To avoid past failures
To forecast inflation rates of healthcare industry, forecast costs and revenues

3. Palms hospital case ASC Procedures
Source: Ambulatory Surgery Center Association

4. BACKGROUND of ASC
PPACA - Strategic planning and financial management necessary for healthcare organizations to maintain stability
Ambulatory Surgery Centers - Rise in trend and revenue
ASC - Mostly physician owned , hospital owned with quality of care and cost savings

5. BACKGROUND of ASC
Medicare Reimbursements - 58% of the amount paid to the hospitals for the same procedure
CMS - strict quality regulations
Main issues - Reimbursement, EMR implementation, Physician alignment, healthcare reform and consolidation

6. Ambulatory surgery centers
First opened in 1970
2.5 million procedures in 1990
Have grown to 20 million by 2009
Medicare approval on new minimally invasive surgery techniques.
Patient preferences
Third party payers preference due to cost
Rapid advancements in technology
Laser, Laparoscopic, Endoscopic and Arthroscopic

7. Exhibit 1 Ownership Structure of ASCs
Source: Ambulatory Surgery Center Association.

8. Exhibit 2
Comparison of ASC and Hospital Outpatient Department (HOPD) Payment Rate.
Source: Ambulatory Surgery Center Association

9. Specific case issues Volatility of input variables:
Number of procedures per day
Average revenue per procedure
Salvage value of building and equipment
Inflation: highly variable
Opportunity cost – loss of inpatient surgeries if outpatient surgery center is built.
$1 million lost annual cash $500, 000 annual cash expenses
Net = $500,000 revenue/ opportunity cost.

10. Analytical tools and methods
Capital Budgeting Analysis
Break-even Analysis
Cash Flow Estimation
Using Excel’s Goal Seek Function
Risk Assessment
Project’s Cost of Capital
Sensitivity Analysis
Return on Investment Analysis
Scenario Analysis
NPV
IRR
MIRR

11. results Sensitivity analysis

12. RESULTS RETURN ON INVESTMENT
Year 1 2 3 4 5
Net Cash Flow
($10,200,000)
$2,297,600
$2,822,528
$2,348,804
$2,116,468
$5,555,562
ROI Measure
Value
Net present value (NPV)
$881,229
Internal rate of return (IRR)
12.9%
Modified IRR (MIRR)
11.8%
Payback
4.1

13. RESULTS BREAK-EVEN ANALYSIS
Variable
Break-Even Value
Number of Procedures 18
Average Revenue per Procedure
$927
Building Equipment Salvage Value
$2,634,619

14. RESULTS SCENARIO ANALYSIS
 Case
 Probability
Number of Procedures
Average Revenue per Procedure
Building/Equip Salvage Value
 NPV
Worst
20.0% 10
$800
$4,000,000
($5,495,223.84)
Most Likely
60.0% 20
1,000
5,000,000
$881,229.13
Best 25
1,200
6,000,000
$6,284,739.28
Total
100.0%
Expected NPV
$686,640.56
Standard Deviation
$3,732,767
Coefficient of Variation
5.4

15. Scenario analysis Contd.

16. RESULTS High risk project high cost of capital
Variable
Value
Cost of Capital
14%
NPV
($288,838)
IRR
(12.9%)

17. Discussion & limitations
Attractive investment :
Reimbursement rates equal to those of hospital
Revenue per procedure being influential factor.
Limited information :
Of hospital’s current cash flow
Inflation rate prediction
Sensitivity analysis: limited
Only considers uncertain variable separately and not interactions among the input variable
Less information of the current cash flow and past failures
Scenario analysis: limited
Only 3 possible scenarios when there could be many possibilities
Assumes definite relationship among variables combined to form best and worst case scenario

18. suggestions
Scenario analysis reveals a negative NPV and CV much greater than the hospital’s average project’s CV we have to consider the expected NPV that considers all these changes at a higher cost of capital of 14%.
If the management is willing to take the risk then they will go forward with the investment, but if they are risk averse they will not make the investment.
With the recent history of failure of the Day Care project, the board may be highly cautious before making further investments.
The local surgeons are considering physician owned facilities, therefore there is likely to be competition in the future.

19. Conclusion
Due to high risk and low profitability, it is suggested that the board should NOT go ahead with the investment

20. References http://www.ascassociation.org/home
Ambulatory Surgery Center Association (2014). Retrieved from
Gapenski, L., & Pink, G. (2009). Palms Hospital: Traditional Project Analysis. In Cases in Health Care finance (pp ). Health Administration Press; Fourth Edition.
Gapenski, L.C. & Pink, G.H. (2011). Understanding Healthcare Financial Management. Chicago, IL:  Health Administration Press
(n.d.). Ambulatory Surgery Centers: A Positive Trend in Health Care. Retrieved from Ambulatory Surgery Center Association website: 73af f136c02de93/UploadedImages/About%20Us/ASCs%20- %20A%20Positive%20Trend%20in%20Health%20Care.pdf
Pallardy, C., & Becker, S. (2013, July 30). 50 things to know about the ambulatory surgery center industry. Retrieved from Becker's ASC Review website: the-ambulatory-surgery-center-industry.html