Sonoma Valley Hospital Forecast

            Sonoma Valley Hospital (SHV) is a nonprofit hospital located in Sonoma California. The hospital has 83 beds and an average daily patient volume of about 40. Sonoma Valley Hospital has been benefitting from a parcel tax which will be effective until 2017. The parcel tax provides approximately $3 million per year and creates financial stability for the organization. Sonoma Valley Hospital’s patient satisfaction is above the nation average, and it is continually rising. It also has an excellent staff satisfaction rate compare to other organizations in the sector. 

            The three main buildings of the organization were built between 1957 and 1978. The aging facilities needed upgrade and improvement. The organization had started the upgrade and improvement process two years ago and had done an excellent job, but the radiology equipment and some physical plant systems still awaiting needed upgrades.        

            SVH has been having a significant decrease in inpatient volumes since 2010. The projection of inpatient in for 2013 would be 1543 compare to 1615 in year 2010. However, outpatient services are increasing which also led to an increase in outpatient revenue.  SVH is considered challenged sustainability under a study of exposure verses readiness of hospitals for the changes in healthcare performed by Deloitte in 2012. The finding suggested that the organization needs to reposition its financial and strategic plans in order to survive in the long run.

            Government sequestration and health care reform are pushing health care organizations toward value based operations. SVH needs to improve its efficiency and reduce unnecessary cost to maintain revenue margin. The organization also needs to be prepared for its $3 million per year capital shortage once the parcel tax expires in 2013. Capital project analysis can be used by SVH to analyze budgets for new projects while conducting the annual capital budgeting. The organization can also incorporate zero-based budgeting in to its plan to eliminated unnecessary projects so that more resource can be saved or relocated to other important operations.

            The future of healthcare profit margins is filled with uncertainties. Government budget cut may lead to constriction in Medicare and Medicaid payment, and other commercial payers will likely to follow suit. SVH will need to find more creative financing techniques, including different kinds of fundraising, and seek extensive partnerships that are able to provide additional capital funding.

Resource

Sonoma valley Hospital (2014). 2014 Three-Year Rolling Strategic Plan. Retrieved from

           http://www.svh.com/wp-content/uploads/2012/03/SVH-Stretegic-Plan-FY2014-
           DRAFT.pdf

Formulation of a Health Care Organization’s Capital Budgets.

            An organization’s capital budget begins with identifying potential projects that are worth the large financial and time investment. “A survey of hospital and health system leaders in Michigan showed that capital budget development typically follows a mixed approach” (Reiter, 2013). Projects are usually started at a departmental level or staffs. The management then evaluates the projects financial and strategic viability, as well as it’s accordance to the organization’s mission and vision. If the projects seem reasonable to the management, then they will be ranked and approved by higher levels of the organization management.

Capital budgeting involves multiple internal and external parties. When planning for an organization’s capital budget, financial manager needs to take all the parties’ opinion into consideration. Some of the major external parties include government payers, commercial insurances, government or control agencies, and the organization’s financial sources, etc. Chief Executive Officer, Chief Financial Officer, and Board of Trustees are all internal parties that may affect the financial decisions of an organization.

Managers must work with the leadership, external parties, as well as internal staffs to create a capital budget that suite the individual organization. “ Ideas and data will likely come not only from physicians and hospital staff, but also from mid-level providers, office nurses, care coordinators, and other stakeholders” (Reiter, 2013). Government entities and commercial insurance payers are also important factors when designing a capital budget since the health care is moving towards value based payment system.

The next step in formulating a capital plan is to categorize projects in accordance with the organization’s strategic plan. Categories can include operational projects like replacements of equipment, and strategic projects like new services. Health care organizations also need to invest in information technology to keep up with the market and it can be categorized as both operational and strategic. Organizations that do not or cannot invest in information technology will likely to suffer in the long run due to the nature of the health care market moving toward utilizing technology heavily.

            After categorized and ranking the importance of projects, an organization needs to conduct financial evaluations of the projects. A popular and widely used method is the net present value method. To conduct a net present value analysis, an estimation of future project cash flows is required. It is a difficult task for managers and leaders to predict the future project cash flows, and it will get harder over time since the health care system is moving from fee-for-service to value-based.

            One drawback for net present value analysis is that it lacks qualitative consideration which will be crucial for a value based system. Health care organization under the value based system will not only be held accountable for expenditures, it will also be held accountable for quality and treatment outcomes. Therefore, other than using net present value analysis as a method to rank projects, health care organizations also need to incorporate qualitative measurement into the capital budgeting process. 

Resource

Reiter, K., & Song, P. (2013). Hospital capital budgeting in an era of transformation. Journal Of Health Care Finance, 39(3), 14-22. 

Market and Financial Forecast

Financial management is one of the very important parts of a health care organization’s strategic planning. Capital budgeting has been increasing its’ importance in the health care sector especially in recent years. Unstable environment created by sequestration and health care reform prompted health care organizations to be extra watchful on organizations’ long-term financial planning and well-being.  Reiter studied the health care sector’s decision-making procedures and capital investment strategies in year 2000. The study showed relative sophistication in most part of the health care system ten years ago, but these existing capital investment strategies and decision-making procedures may not be sufficient for the future of health care.  

Understand Value Based Purchasing:
http://youtu.be/WRZDWPQeAXI 

Resource

Reiter, K., & Song, P. (2013). Hospital capital budgeting in an era of transformation. Journal Of Health Care Finance, 39(3), 14-22. 

What is Capital Budgets and Why is it Important?

What is Capital Budgets and Why is it Important

Moody’s and Standard and Poor’s report in 2013 states that 18 percent of the nonprofit hospital it rates had operating losses in 2011. The health care system is changing over from the traditional fee-for-service payment method to value based payment system (Zismer, 2013). A better future outlook for revenue generating from patient service is going to be a challenging task for health care organizations due to the reform of the health care system. Health care managements need to have a thorough understand of finance in the health care system to better prepare an organization for the upcoming challenges. Health care organizations, especially non-for-profit health care organizations, need to have accurate and strong financial plans and capital budgets to accompany their organizations’ strategic plans. “Their position is very different from that of taxable firms, whose access to capital for both replacement and new capital access can and should be directed back to equity investors” (Cleverley, 2011, p. 506).

                                   

Health care providers used to be able to cover the revenue lost by cost shifting. Cost shifting is when providers increase price for service provided to patients with commercial insurers in order cover the lower charges from government programs like Medicare and Medicaid. However, with change in the overall health care environment, more and more private insurance companies are following the payment schedule of Medicare. Cost shifting is no longer a viable option for health care providers to recuperate lost revenues.

Since cost shifting is coming harder and harder to achieve, health care organizations need to find other venues to maintain its’ financial viability. Financial expenses are expected to grow continuously, and financial planning becoming increasingly critical for health care organizations. In order to maintain market share and revenue, health care providers would need to continually access the markets’ need. Health care providers need to keep up with the market with new popular programs, sufficient staffing, renewed facilities, renovation of old equipment, and the use of new technology, etc to maintain customer satisfaction and improve future financial stability.

Capital budgeting, also known as investment appraisal, is a process used by organizations to determine an organization’s long-term investment’s worthiness.  “Capital budget is the yearly estimate of resources that will be expended for new programs during the coming years” (Cleverley, 2012, p. 420). Some of the major methods used for capital budgeting are net present value, payback period, and profitability index. The main goals for capital budgeting is to rank projects on hand to set priorities by providing forecast of revenues and expenditures of different new projects. It is very important to the strategic and financial planning of a health care organization since it usually involves a large capital investment and a long time frame. 

Resource 

Cleverley, W., Song, P., & Cleverley, J. (2011). Essentials of health care finance (7th
           ed.). Sudbury, MA: Jones & Bartlett Learning.

Zismer, D. K. (2013). How Might a Reforming U.S. Healthcare Marketplace Threaten Balance Sheet Liquidity for Community Health Systems?. Journal Of Healthcare Management, 58(3), 168-172. 

Where is the Money! U.S. Health Care Today.

According to Jay Sterns, the director at Barclays Capital, if we combined the largest nonprofit health systems in the United States, that organization would have an annual operating revenues of $77 billion and a cash or cash equivalent of $35 billion. This equals to approximately $0.50 cash on hand for every dollar of annual operating revenue. Compare to a normal United States large public company, which usually has estimated $0.77 cash on hand for every dollar of annual operating revenue, the health care system’s cash on hand seemed insufficient (Zismer, 2013).

Although most health care organizations are not-for-profit, it is still important for the organizations to have a balanced budget. There are not stockholders and investors for nonprofit organizations to report their earnings to, but in order to maintain financial viability,  it is preferable for the organizations to have their revenue at leave equal to their costs if not exceed their cost.

The two biggest financial uncertainties that healthcare industry are facing today come from the government budget cut and the health care reform. The automatic federal budget cut, call the sequestration, would reduce the federal budget by $85 billion. Jobs and government programs are the first to get effected by the sequestration. iVantage Health Analytics, a Maine health care research firm estimated that about $3 billion would be lost from approximately 4200 hospitals. The budget cut may cause nearly 100 hospitals’ operating margin turn from positive to negative (Pugh, 2013).

The Patient Protection and Affordable Care Act (PPACA), also referred to as healthcare reform, makes health care insurance coverage obtainable for families and individual that are otherwise not able to afford the cost of health care insurance. PPACA provides financial assistance for people to purchase insurance plans through the health care insurance exchanges. Under the act, states have the option to extend coverage in Medicaid to the majority of population with incomes under 138% of poverty. It also provides tax credits, reduced cost sharing that are paid by the federal government.

The federal budget cuts and the health care reform can lead the United States health care system into an uncertain future on top of an already volatile environment. According to Sterns (2011), one of the authors of Capital Efficiency and Integrated Health System Designs, the health care systems are often weak on capital and budgets due to reasons like the governing rules of tax-exempting borrowing, and difficulty in raising funds because of nonprofit status. The health care reform implemented and will be implementing many major changes that will affect health care organizations both financially and operational. 

The following YouTube video gives a brief description of the U.S. health care today and future!
http://youtu.be/y51eT-1-BE8 

Resource

Pugh, T. (2013). Looming Federal Spending Cuts Will Hit Hospitals Where it Hurts. McClatchy. Retrieved from http://www.mcclatchydc.com/2013/02/28/184476/looming-federal-spending-cuts.html

Standard & Poor’s (2013). U.S. Not-for-Profit health Sector Outlook: Providers Prove Adaptable but Face a Test in 2013 as Reform Looms. Ratings Direct. New York, NY: Standard & Poor’s Rating Services.

The Henry J. Kaiser Family Foundation (2012). Focus on Health Reform. Menlo Park, CA: The Henry J. Kaiser Family Foundation.

Zismer, D. K. (2013). How Might a Reforming U.S. Healthcare Marketplace Threaten Balance Sheet Liquidity for Community Health Systems?. Journal Of Healthcare Management, 58(3), 168-172.

Zismer, D. K., Sterns, J. B. & Claus, B. (2011). Capital Efficiency and Integrated Health System

Designs. Healthcare Financial Management, 65(7), 88-94.