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I n t r o d u c t i o n ➤ t o ➤ t h e ➤ F i n a n c i a l ➤ M a n a g e m e n t ➤ o f ➤ H e a l t h c a r e ➤ O r g a n i z a t i o n s3 4 0

MINI-CASE STUDY✓

A➤federally➤qualified➤community➤health➤center➤is➤implementing➤

an➤electronic➤medical➤record➤(EMR)➤costing➤$35,000➤per➤physi-

cian➤provider.➤Identify➤benefits➤of➤the➤EMR➤and➤ways➤the➤ben-

efits➤can➤be➤estimated➤to➤calculate➤a➤benefit-cost➤ratio.

information from neighboring facilities or the manufacturer. If the manager obtains the information from the manufacturer, it is a good idea to confirm it with other organizations that use the same equipment—manufacturers should be willing to provide client lists.

For equipment that does not generate revenue, department managers can still project cash flow by using salary savings, utility savings, and so on.

Previously incurred costs, or sunk costs, and costs that would be incurred regardless of the budget outcome should not be included in cash-flow projections.

steP 20: Perform fInAncIAl AnAlysIs

The twentieth step in the corporate planning process—the third step in the capital budgeting stage—is for the budget committee or the chief financial officer (CFO) to perform financial analyses on the requests. Before Medicare stopped reimbursing capital at cost, few healthcare organizations performed any significant financial analyses on equipment because in the risk- free environment of cost-based reimbursement, healthcare organizations and their lenders were guaranteed a return on capital expenditures regardless of whether they used the equipment. In a 1973 study of large hospitals, only 8 percent of the hospitals calculated the net present value of a capital expenditure before purchasing it (William and Rakich 1973). Some hospitals had two of everything in case the first broke (they preferred capital expense to labor and repair expenses).

As the Medicare reimbursement for capital costs was folded into the DRG formula during the 1990s as a result of the OBRA of 1990, healthcare organizations found them- selves competing with other industries for limited capital funds. Healthcare organizations no longer had cost-based reimbursement to put up as collateral, and as a result, lending institutions required financial analyses to ensure that the capital expenditure would generate sufficient revenue to repay the loan. As a result, net present value and return on investment calculations are completed on most capital expenditures today.

This section defines and explains how to calculate several analyses that are used to measure the benefit-to-cost ratio. In theory, these analyses are benefit-cost analyses, which are based on the Pareto optimality, or a condition in which changes occur only if they improve the

benefits more than they increase the costs. In benefit- cost analysis, both costs and benefits are variable, as opposed to cost-effectiveness analysis, where either costs or benefits are held constant. In their simplest forms, benefit-cost analysis is the ratio of discounted benefits to discounted costs, and cost-effectiveness analysis is the benefits obtained for a particular cost.

The typical financial analyses for capital expen- ditures are payback period analysis, net present value analysis, and internal rate of return analysis. Each type of analysis will be explained in the sections that follow.

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EBSCO Publishing : eBook Collection (EBSCOhost) - printed on 11/29/2019 6:55 PM via SOUTHERN NEW HAMPSHIRE UNIV AN: 1839058 ; Nowicki, Michael.; Introduction to the Financial Management of Healthcare Organizations, Seventh Edition Account: shapiro.main.eds