Human Resource Management homework

GeorgePink_2018_Case11GulfShoresSurge_GapenskisCasesInHealt1.pdf

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CASE

Gary Hudson was born and raised in Pensacola, Florida. He obtained his bachelor’s degree in business from Florida State University, where he enrolled in the Naval Reserve Offi cers Training Corps program. After graduation, he received a commission in the US Marine Corps. Following his release from active duty, Gary used his GI Bill benefi ts to obtain a master’s degree in health services administration from the University of Florida. His fi rst job in healthcare was as a special projects coordinator/fi nancial analyst at a large Miami hospital. He enjoyed his work there, but his ultimate goal was to return to Pensacola as the manager of a small healthcare business, where he would have more responsibility and authority. After fi ve years in Miami, Gary became the chief operating and fi nancial offi cer of Gulf Shores Surgery Centers, an investor-owned chain of ambulatory surgery centers with six locations in Florida’s Panhandle.

Immediately after assuming his new position, Gary found himself fac- ing several decisions. First, Gary had to select a bank or banks to meet the fi nancial needs of Gulf Shores. He has approached two local banks—Sun Trust and BankSouth—about the interest rates they off er on a savings account and a certifi cate of deposit (CD) as well as the rate charged on a term loan. Sun Trust and BankSouth off er the same interest rate on each fi nancial product and only diff er in the frequency of compounding (exhibit 11.1).

Second, a wealthy patient was so impressed with the care she received at Gulf Shores that she decided to make a series of donations to the facility. She will donate $75,000 a year for the fi rst six years (t = 1 through t = 6, where t = time) and $150,000 annually for the following six years (t = 7 through t = 12). Th e fi rst deposit will be made a year from today (t = 1). In addition,

G U L F S H O R E S S U R G E RY C E N T E R S TIME VALUE ANALYSIS

C o p y r i g h t 2 0 1 8 . H e a l t h A d m i n i s t r a t i o n P r e s s .

A l l r i g h t s r e s e r v e d . M a y n o t b e r e p r o d u c e d i n a n y f o r m w i t h o u t p e r m i s s i o n f r o m t h e p u b l i s h e r , e x c e p t f a i r u s e s p e r m i t t e d u n d e r U . S . o r a p p l i c a b l e c o p y r i g h t l a w .

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Cases in Healthcare Finance80

she has just written a check for $250,000, which Gary will invest immediately (t = 0). Gary will invest all of the donations in a CD as they become avail- able. CDs are generally offered in maturities of six months to ten years, and interest can be handled in one of two ways: the investor (buyer) can receive periodic interest payments, or the interest can automatically be reinvested in the CD. In the latter case, the buyer receives no interest during the life of the CD but receives the accumulated interest plus the principal amount at maturity. Because the goal of this investment is to accumulate funds for future use, as opposed to generating current income, all interest earned on the CD would be reinvested.

Third, Gulf Shores may launch substantial building renovations. In this circumstance, it would be forced to borrow $250,000 from a bank. Gary is considering two options for a term loan:

1. A five-year term loan that would be repaid in equal annual installments, with the first payment due at the end of Year 1. Gary hopes to pay off the loan early—at the end of Year 3.

2. A seven-year loan that would be repaid in annual installments of differing amounts, with the first payment due at the end of Year 1. For the first three years of the loan, the annual installment would be projected cash surpluses ($25,000 at the end of Year 1, $50,000 at the end of Year 2, and $75,000 at the end of Year 3). For the final four years of the loan, the annual installment would be a fixed (but currently unspecified) cash flow, X, at the end of each year from Year 4 through Year 7.

Finally, Gulf Shores has a board-designated building fund to pay for projected facility renovations starting in eight years and lasting for four years (at t = 8, 9, 10, and 11). Current building renovation costs are estimated to be $14,500,000 a year, but they are expected to increase at a rate of 3.5 percent a year. So far, Gulf Shores has accumulated $15,000,000 (at t = 0). Gary’s long-run financial plan is to add $5,000,000 in each of the next four years (at t = 1, 2, 3, and 4). Then, he plans to make equal annual contributions in each of the following three years (t = 5, 6, and 7).

All of the decisions Gary faces involve time value analysis.

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Case 11: Gulf Shores Surger y Centers 81

EXHIBIT 11.1 Interest Rates on Three Financial Products

Nominal

Bank Product Compounding Interest Rate

Sun Trust Savings account Weekly 2.0%

Certificate of deposit Monthly 3.0%

Term loan Quarterly 4.0%

BankSouth Savings account Daily 2.0%

Certificate of deposit Annually 3.0%

Term loan Semiannually 4.0%

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CASE

Mid-Atlantic Specialty., Inc., is a not-for-profi t corporation formed by physicians in the College of Medicine at Mid-Atlantic University. Mid- Atlantic, with more than 600 physicians, provides the medical staff for University Hospital. In addition, Mid-Atlantic staff s and administers a network of 25 ambulatory care clinics and centers at ten locations within 50 miles of University Hospital. In 2017, Mid-Atlantic generated more than $500 million in revenues from about 40,000 inpatient stays and 750,000 outpatient visits.

More than 70 percent of Mid-Atlantic’s revenues currently come from inpatient stays, but this percentage has been declining; by 2018, more than half of Mid-Atlantic’s revenues are expected to stem from outpatient services. As improvements are made in technology and as third-party payers continue to pressure providers to cut costs, more and more inpatient services will be converted to outpatient and home care. For example, in 2007, 80 percent of Mid-Atlantic’s ophthalmological surgeries took place in University Hospital, whereas in 2017, 80 percent were performed in outpatient settings.

Although Mid-Atlantic has traditionally provided only specialty ser- vices, in 2017 it instituted a “personal physician services” program, in which patients can receive both primary and specialty care from College of Medi- cine physicians. Th is was the fi rst step in Mid-Atlantic’s drive to develop an integrated delivery system, which off ers a full range of patient services. Now that the system is in place, Mid-Atlantic is contracting with man- aged care plans to provide virtually all physician services required locally by plan members. Furthermore, Mid-Atlantic is examining the feasibility of contracting directly with employers, and hence bypassing managed care

M I D - AT L A N T I C S P E C I A LTY, I N C . FINANCIAL RISK

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