- You are working in the finance department at a large, for-profit hospital in a city.
- Your duties involve budgeting, managing the general ledger accounts, utilizing financial formulas to perform accounting activities, and training and development of your three subordinates.
- Because of scarce resources, you must choose between two projects (I.e., Build a Rehab. Center or Build a Neonatal Wing).
- Create a financial analysis of these projects and based on Net Present Value (NPV), Return on Investment (ROI), and Profitability Index (PI).
- Describe NPV, ROI, PI and payer (case) mix and their use/value in assessing the validity of the two projects.
Financial Analysis of Rehab Center vs. Neonatal Wing: Tools to Make the Decision
Since we have to choose between the Rehab Center the the Neonatal Wing (due to limited capital), we will decide based on four measures, NPV, ROI, PI and product mix (case or payer mix). These methods and their use and merits, in order of least useful to most useful, are discussed below, along with a recommendation to let NPV weigh the heaviest in the decision outcome.
Profitability Index (PI)
This is the ratio of the present value of the future cash flow to the initial investment. It is an alternative way of expressing the NPV as an index rather than a dollar amount. It is easy to interpret (If the project is over 1, accept. If the project is under 1, reject). However, NPV is just as easy to interpret (If the NPV is positive, accept. If the NPV is negative, reject) so it does not bring any additional predictive power to the decision above and beyond NPV so it is duplicative and not needed. So, we do not need to use this unless we have board members who need this SUPER SIMPLIFIED for them. Since our board is fairly versed in basic business concepts, this is not needed.
Payer Mix (Case mix or product mix)
Payer mix impacts the cash flows that are used in the analysis. That is, when the payer mix includes high yield payers, those paying the closest to retail rates and paying promptly with fewer iterations, the cash flows are stronger. So, for instance, if a large portion of the patients in rehab are indigent or uninsured versus the Neonatal Wing, ...
Your discussion is 919 words and four references and discusses how PI is duplicative and not needed and how payer mix and ROI are part of the NPV, leaving NPV as the stronger metric of the four. Examples are based on the healthcare industry. The discussion has an introduction paragraph and conclusion and is a draft for you to use as a starting point for your work.