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Financial Planning Model - Essay Example

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When Stanford University Hospital embarked on an infrastructure modernization, a financial model of hospital expense, revenue and cash flows was created to allow for projections to be made based on key variables, over a ten-year period beginning in 1980. The purpose of the model was to determine the feasibility of the project and to find out clearly that a positive net cash flow would be maintained throughout the project…
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Summary: A Financial Planning Model for Estimating Hospital Debt Capa When Stanford Hospital embarked on an infrastructure modernization, a financial model of hospital expense, revenue and cash flows was created to allow for projections to be made based on key variables, over a ten-year period beginning in 1980. The purpose of the model was to determine the feasibility of the project and to find out clearly that a positive net cash flow would be maintained throughout the project. Moreover, the financial model had to be flexible and responsive to the variables identified for testing in various scenarios. Three features of the model distinguished it from earlier efforts in hospital financial planning: (1) patient demand is projected by location, by type of care, and source of funding (Medicare-Medicaid or private pay; (2) incorporates a detailed cost reimbursement formula for determining the net revenue from Medicare and Medicaid patients; (3) incorporates the full incremental cost and revenue associated with each type of patient, where the relationship of hospital costs and revenues to patient volume was estimated and built directly into the forecasting model.
The projections made by the financial model are affected by the following 10 key variables: projected annual patient days, basic inflation rate, growth rate of revenue per patient day, growth rate of operating costs, ratio of variable to fixed costs, construction inflation rate, ordinary capital expenditures (for example, for equipment), long-term interest rate, availability of gifts for capital, and projected changes in Medicare- Medicaid reimbursement (that is, the projected growth in Medicare and Medicaid utilization, Medicare per diem routine nursing limitations, and the loss from new Medicare-Medicaid limitations). Among the ten variables, projected annual patient days was seen as having a major impact on financial projections and the model was tested based on three scenarios of the growth in patient days: "base case," higher demand case" and "no-growth case". Testing under these patient growth scenarios revealed that only the no-growth case would result in negative cash flow in any year. However, "the duration and intensity of are not significant" - and accordingly, even under this situation the shortfall would be covered by short-term borrowings of the hospital. Even under a case where patient days would not experience growth, the project would still be financially feasible.
In addition to testing for patient day growth projections, the financial model was also used to identify and test which among variables are sources of considerable financial risk. Among the variables that would have the most adverse effect ("high sensitivity) on the net cash-flow of the hospital are patient-day demand, revenue per day, operating costs, and Medicare-Medicaid limitations and losses. A scenario of reduction in patient demand would come from overstated population growth projections and the competitive field in which Stanford Hospital operates. Revenue per day was considered a more significant risk as there are higher prices and services per day - and could come from government price controls and market forces. Pressures on operating costs could come from wage increases that however the financial forecasts made clear should not be greater than inflation. Future limits on Medicare and Medicaid support could also pose as a risk to cash-flow as it is expected that the Federal government would continue to limit the amounts for reimbursement. To cover this, the financial proposal made allowance of $1 million per year of losses in the base-case projections beginning 1980-1981. Even in combination, however, these high-risk variables even when they do result in negative cash flow, Stanford Hospital could still cover for the shortage by minimally cutting back on operating costs. Read More
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