The Marginal Cost of Providing an Extra Units of Care - Essay Example

The best strategy for any company not depending on the sphere of operation is to find the optimal source of finding at the lowest possible cost that would be sufficient to service current needs and potential company growth. The case of a cardiac reveals several problems in its' operations which have lead to cash shortage and company being not able to sustain itself longer. The hired financials team have correctly identified the problems within the company and to identify the problem is the first way to solving it. The first problem was stated as giving huge discounts to managed care companies which resulted in costs incurred with providing this care greater than the benefit from having so many clients and providing corporate health care for them. As these discounts are likely to be provided on several years terms, it is impossible to eliminate the cash shortage problem by changing these discount immediately. This measure would affect the quality of the patient care in the hospital and make it lose even more money. The company must try to cut down the variable costs of the company which are usually subject to economies of scale. Up to certain point the marginal cost of providing extra unit of care is less than the average cost and thus the company should try to achieve the optimal level of servicing clients and try to cut down the variable costs. The second problem was estimated as giving nurses too high wages as the need for acute nurses was not met. If the increased wages were due to the fact that there was need for such services, this choice cannot also be eliminated and the staff should not be downsized. On the other hand, the best strategy would be to downsize the agency staff costs which are not directly associated to providing care services and thus must be at the optimal level. The agency staff hiring that the optimal number needed for successful hospital operation was estimated wrong and must be revalued as agency or contract staff is usually paid twice as much as regular workers for the same amount of utility they bring to the hospital. The third problem was low medical reimbursement levels which amounted to 70% charged to clients. As the hospital derives approximately 40% of its' revenues from Medicare patients this is a big loss for the company and this reveals that the staff hired to work in this direction is not performing efficiently thus resulting in working capital shortage. As the Medicare payments cannot be changed directly by the hospital and are set based on historical costs, the company can eliminate this problem only by providing efficient system of monitoring in time receiving these payments. The company has also experienced dramatic growth in current liabilities which mean that the company was spending a lot even though no major purchases for the company were made. This means that the hospital is not allocating resources efficiently. The next problem was estimated as unused equipment in patients' rooms which means some strategic mistakes which lead to purchasing this equipment but now it is not used. Together with reducing agency staff expenses the second strategy was chosen to reduce the staff benefits which include health insurance, retirement, salary increases above the market salaries, different bonuses and paid leave benefits. This can be a bad strategy in the long term as the best doctors can leave the hospital but the optimal choice would be to reduce these benefits for the newcomers to the hospital and reward those who add the highest value to the hospital services quality. This will on the other hand give incentives to newcomers to work harder to achieve higher rewards. This will generate sufficient cash flows for the hospital in the short term and will not affect the customer services quality hypothetically and slightly. These two measures of cost reduction will save the company $4,717,000 while the hospital has savings goal of $900,000 and is expected to receive over $2,300,000 in three months that is why it has to generate some cash until then, operate successfully but still meat its' savings target. There are two loans opportunities which can be repaid in 12 months with interest rates varying from 9% to 9,45%. The company should choose the loan that provides the best interest savings and is for the optimal time for the company. As the company is expected cash inflows in three months, it should take the loan for the shortest period possible which is 3 months. Choosing the first loan option with the total loan amount of $1,217,000 and monthly debt servicing of $106,691 generates the highest interest savings for the company of $36,742 though the interest rate on this shorter time loan is higher and is 9,45% and allows it to cover its' short time working capital shortage. There is risk that 3 months can be a too short time period but it is worth taking it counting on receiving funds from Medicare. The result of this strategy reveals that the company has met its' saving target without losing quality of servicing and meeting cash shortage. As the company has grown the number of customers it is servicing now it needs to increase the efficiency of the equipment it has and increase the range of services which are demanded and the company cannot produce now. The first equipment the company must purchase is the High-speed CT scanner and the purchasing or leasing options include buying it or leasing it and with which loan. The scanner is the case of the equipment that shall not be outdates very soon and it could be good to buy it. Out of new loan and refurbishing loan, the second choice is more beneficial as it is less, the interest rate on it is less than for new loan, monthly installments are thus lower though the term is the same and the annual maintenance is lower though advance payments are the same for both loans. The most important indicator is that out of two loans, the present value of the second loan, or the refurbished loan is smaller and thus it will cost the company less in todays' money to acquire such important equipment. The scanner is not new and is refurbished and thus the hospital will be able to use it until its' completely depreciated and then purchase a new updated one instead of purchasing a new one now which will be obsolescent soon while its' operating costs are high. The second machine is X-ray machine. If the equipment could prove to work long time and not to be outdates in several years, it would be most profitable for the hospital to buy it but this is not the case and to refurbish loan for the first equipment piece would be the most financially beneficial strategy. As the useful life of X-ray machine is 15 years, it will be beneficial to purchase it on capital lease which will increase the assets and improve the balance sheet of the company. Though monthly installments for this option are the same to new loan, the present value of the capital lease is lower and thus will provide better choice over new loan for the hospital. Capital lease is more beneficial than refurbished loan as the age of equipment is 8 years in the latter case and annual maintenance is much higher. The capital lease is better than operating, as the age of the equipment offered for the latter is 10 and though upgrade option exists, capital lease of equipment in good quality with good value (lower than buying new equipment at loan). Thus, the optimal strategy is capital lease. The third piece of equipment, or the Ultrasound system has the useful life of 5 years and the lowest present value of payments possible to make on it is purchasing it under operating lease which gives us the right to upgrade this equipment in 3 years. The third need is to find the best funds for capital expansion and the best selection was HUD option which gave the highest project positive Net Present Value of $221,221 with the same cost of funding the project for all the choices at the level of $75,000. Thus, this source of funding will provide the highest rate of NPV per each dollar invested and will be the optimal resource allocation. The simulation was very useful in taking on real financing decisions which will be usefully applied in almost every day life for my future finance job. Read More