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Operating Budget Case Study Background The Major Health System is located in a major metropolitan area where there is significant competition in both the inpatient and outpatient settings. Physicians are dedicated to the health system and includes a residency program in multiple specialties. The market share of the organization has been stagnant at best in the past three years, hovering around 35%, with significant pressures by managed care payors on the ambulatory or outpatient rates. The system is looking at several projects and would like to implement at least one of these over the next fiscal year with more upcoming: trauma program, skilled nursing facility, ambulatory surgery center, community wellness center with rehab and open heart program. The health system employs approximately 20,000 people including 1,000 employed physicians in various inpatient and outpatient specialties. The statistics are included in the below table with market growth of 1% in the overall statistics for next year:

Statistics FY 2016

Admissions 35,453

ER Visits 243,719

Outpatient Surgeries 7,659

Cardiac Catheterizations 14,963

Patient Days 159,539

Case mix index 1.61

Financial Statements: The health system has endured some tough years financially in the past three years with reimbursement challenges and outmigration of its more profitable services to physician-owned surgery and imaging centers. Below is the balance sheet and income statement for the organization:

September 30, 2016($ in 000s)

Assets

Cash and Equivalents $54,651

Patient Accounts Receivable 124,589

Other Current Assets 79,154

Total Current Assets 258,394

Property, Plant & Equipment 225,632

Long Term Investments 120,000

Other Assets 86,686

Total Assets 690,712

Liabilities and Net Assets

Current Maturities of Long-Term Debt 18,651

Accounts Payable and Accrued Expenses 65,498

Other Current Liabilities 12,484

Total Current Liabilities 96,633

Long-term Debt 223,812

Total Liabilities 320,445

Net Assets 370,267

Total Liabilities and Net Assets 690,712

12 Months Ended 9/30/16 ($ in 000s)

Net Patient Revenue $385,251

Other Revenue 14,781

Total Revenues 400,032

Expenses Salaries, Wages & Benefits 225,585

Supplies 81,687

Purchased Services 51,698

Depreciation and Amortization 21,898

Interest 11,191

Total Expenses 392,059

Income from Operations 7,973

Nonoperating Gains/(Losses) 4,329

Excess Revenues over Expenses 12,302

Assumptions

Net revenue for the organization is based on the following payor mix:

Medicare 49%

Managed Care 31%

Medicaid 12%

Self Pay 8%

Supply inflation is estimated at 2% over the next year with rate increases for Medicare and Medicaid at the same. Managed care rate increases are challenging with early estimates at 3% but could go to 5% with better negotiations. Personnel cost increases for salaries and wages are estimated to increase 4% next year with more competition for labor resources.

Capital requests include $18 million of routine replacement with $30 million available in project capital for the following key projects:

• Trauma Center- $25 million plus $10 million in operational expenses each year with $4 million in revenues for year 1

• Skilled nursing facility- $30 million plus $5 million in operational expenses each year with $3 million in revenues for year 1

• Ambulatory surgery center- $12 million plus $8 million in operational expenses and $12 million in revenues for year 1

• Wellness center with rehab services- $8 million plus $3 million in operational expenses and $2 million in revenues for year 1

• Open heart program- $12 million plus $5 million in operational expenses and $4 million in revenues for year 1

Assumptions

The goal is to put together a budget for both operations and capital for the following year that will improve the operations and gain market share for the organization, utilizing the resources most efficiently and setting the course for the organization’s long-term objectives of improving market share by 5% over the next 3 years and improving its outcomes for its community.

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