What is the payback period for the new MRI

Name: ________________________________________

Short-answer – answer EACH of the following 3 questions (20 points each). All numerical answers (e.g., dollars, percentages) must be calculated to the 2nd decimal point.

1. It is January 2, 2012 and you have started your first day of work as the Practice Administrator for the Tri-Cities Geriatric Center (a physician practice serving older adults). Your first job is to project a budget for calendar year 2012. In gathering information for this task, you come across budgets for the past 3 years. However, the former Director did not complete budget worksheets (maybe the reason he was fired), so you don’t have complete information.

a. Complete the CY 2009, 2010, and 2011 budgets (Table 1a) b. Construct a P&L statement for CY 2012, explaining why you projected

EACH number. c. Assume that it is now January 2, 2013 and the actual budget numbers were

reported for CY 2012 in Table 1b. Complete a budget variance report for CY 2012. What does this variance report tell us about revenues and expenses (profit/loss)? What could you have done to increase profit or prevent loss?

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2. Sacramento Memorial Hospital has the following financial data and operational metrics:

Number of beds 250 Total inpatient admissions 12,250 Total outpatient visits 90,754 Total patient revenues $111,900,050 Outpatient mix 16.2% Medicare payment percentage (revenues) 28.0% Average length of stay 5.8 days Net price per discharge $7,653 Cost per discharge $6,292

a. What is the hospital’s profit per discharge? What does this tell us? b. What is the hospital’s total inpatient revenue (HINT: apply patient mix metrics to

total revenues). What does this tell us? c. What are the hospital’s total revenues from Medicare patients? What does this

tell us? d. What is the total number of inpatient days? What does this tell us? e. What is the hospital’s occupancy rate? What does this tell us?

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3. The COO for Mountain Hospital believes that the Magnetic Resonance Imaging (MRI) machine at the hospital should be replaced but does not want the current MRI machine to be down until the new machine is operational. A team of clinicians and administrators has evaluated several MRI options and decided to purchase a product from GE at a cost of $1.5 million. The new MRI is expected to last 7 years (life cycle), have utilization (number of patients) per year as shown in Table 2a, and generate revenue of $3,200 per patient. In order to keep the current MRI machine in operation, the hospital will have to build a new MRI suite at a cost of $500,000. Assume Mountain Hospital’s corporate cost of capital is 10%.

a. What is the payback period for the new MRI? b. What is the NPV for the project? What does this mean? c. What is the IRR for the project? What does this mean?

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Our Reference is:

Gapenski, Louis C. (2013). Fundamentals of Healthcare Finance, 2nd edition. Chicago, IL: Health Administration Press. IBSN 978-1-56793-475-5.

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