Business Plan 1

Business Plan for Sample General Hospital Retail Pharmacy

Ramon D. Sebastian

HCA 311 Health Care Financing

Marquita Blackwell

August 3, 2009

Business Plan 2

Business Plan for Sample General Hospital Retail Pharmacy

This paper creates a business plan for a Retail Pharmacy in a hospital at Metropolis Health

System (Baker & Baker, 2006).

Business Plan 3

Executive Summary

The Company, The Vision, The Founders

Sample General Hospital is a member of the Metropolis Health System’s group of health

care service providers. Under the direction of its CEO, Ronald McDonald led the hospital since it

was built in 1975. It has since expanded to offer a separate ambulatory surgery center and

outpatient clinic.

Market Opportunity

The opportunity was realized when patients’ complaints came in that prescription orders

were being filled incorrectly due to Rite-Aid pharmacy’s misunderstanding of the written

prescriptions they were handed. Sample General Hospital already had an electronic system for

maintaining its medication records and for physicians to prescribe medication. The need to

electronically communicate this information to the medication supplier was needed. The original

concept of developing an internal pharmacy was discussed and decided upon soon after.

Use of Proceeds

The original proposal seeks $130,000, $80,000 for renovations and $50,000 for equipment.

Initial inventory of $303,400 for pharmaceuticals will be based on the pharmaceutical

companies’ 60-day accounts payable cycle so there will be no need for an initial inventory

investment.

Gross Offering $179,789

Planned Uses

Capital Expenditures

Building Renovations 80,000

Business Plan 4

Software Purchase 10,000

Furniture and Fixtures 40,000

Total Proceeds for Capital Expenditures 130,000

Working Capital

Salaries and wages 48,000

Other Expenses 1,789

Total Proceeds for Working Capital 49,789

Total Uses $179,789

Financial Snapshot (Projected)

Year 1 Year 2 Year 3

Rx Sales 2,587,613 2,692,152 2,828,375

Cost of Goods Sold 2,047,950 2,088,909 2,151,576

Gross Margin 539,663 603,243 676,799

GM% 20.9% 22.4% 23.9%

EXPENSES

Salaries and Wages 192,000 197,760 203,693

Benefits 38,400 39,552 40,739

Materials and Supplies 12,000 14,400 17,280

Contract Services and Fees 14,400 17,280 20,736

Depreciation and Amortization 15,333 15,333 15,333

Interest 0 0 0

Business Plan 5

Provision for Bad Debts 25,876 26.922 28,284

Misc. Expenses 3,600 4,320 5,184

Total Expenses 301,609 315,567 331,248

Cash Flow

Sources

Net Income 238,053 287,676 345,550

Depreciation 15,333 15,333 15,333

Borrowing 0 0 0

Total Sources 253,386 303,010 360,884

Uses

Capital Purchasing 130,000

Working Capital 49,789

Total Uses 179,789

Cash at Beginning of Period 73,597 376,607

Net Cash Activities 73,597 303,010 360,884

Cash at Ending of Period 73,597 376,607 737,490

The Enterprise

The Company

Sample Pharmacy will supply prescription medication in its new facility at the Sample

General Hospital. All inpatient medication will be dispensed through the pharmacy while the

counter prescription orders will be filled through its retail store front located inside the main

campus of Sample General Hospital.

Business Plan 6

At the onset, the proposed pharmacy will only have one revenue stream from sales of

prescription medication. The service of a licensed pharmacist will be required for each

medication dispensed by the pharmacy with support from pharmacy technicians. The pharmacist

will also act as the department manager overseeing all aspects of the pharmacy operations.

General, non-pharmaceutical services include general office services, accounting, and

scheduling.

Surrounding medical office buildings and outpatient surgery centers will also be able to

have their prescriptions filled directly from the physicians’ offices. Physicians will have the

option to use the new electronic medication and prescribing device or phone in their patients’

prescriptions allowing the pharmacy to have their medication ready by the time they reach the

pharmacy. Prescription delivery within a 5 mile radius of Sample General Hospital will also be

available to those that request it.

The Founders

Ronald McDonald, the Chief Financial Officer (CFO) of Sample General Hospital came up

with the idea to open the pharmacy when he looked into different options to increase revenue at

the hospital. With the help of his accounting manager, David Shoemaker, they developed the

financial documentation necessary to create the proposal to present to the board of trustees.

The Vision

Sample Pharmacy expects to recoup the original capital expenditure of $179,789 within the

first year of operation. Projections reveal that by the end of the third year of operation, Sample

Pharmacy will have over $700,000 cash available for expansion. The first expansion will be to

offer over-the-counter drugs, cosmetics, fragrances, hair and skin care products, magazines and

books, vitamins, greeting cards, batteries, disposable diapers, oral hygiene products, contact lens

Business Plan 7

solution, and diet aids. There will be no need to increase the current space that the pharmacy will

occupy as the current configuration of the pharmacy already allows enough retail display space

and inventory storage space.

Future expansion will include additional services similar to those offered by larger drug

stores. Services will include sales of refrigerated beverages, snacks, and film processing. Once

established, similar pharmacy expansions will also be developed at the other hospitals of the

Metropolis Health System.

The Product

Pharmaceuticals, as the main product, have the advantage of financing itself through the

accounts payable cycle. Since pharmaceutical companies allow sixty days for payment, this

allows the pharmacy to carry its main inventory at no cost. The pharmacist will be delegated

with the responsibility of maintaining an ample supply of prescription medication to satisfy the

needs of the pharmacy. All other supplies will also be monitored by the pharmacist with the

support of the pharmacy technicians.

Together with the rest of the hospitals within the Metropolis Health System, Sample

Pharmacy can utilize MHS’s purchasing power to obtain the best prices available for the

pharmaceuticals.

Competitive Advantage

Sample General Hospital’s medication monitoring information system currently in place

allows the physician to prescribe medication directly from an electronic handheld device. This

improvement has significantly reduced medication errors to less than .01%. The current

information system ordered for the Sample Pharmacy will directly interface with Sample General

Hospital’s system allowing the physician to automatically send the prescription to the pharmacy

Business Plan 8

when the prescription is “written.” The prescription order is immediately filled and either

delivered to the patient at the hospital or outpatient surgery center, or, if ordered from one of the

medical offices, the prescription will either be waiting for the patient to pick up or delivered

directly to the patient’s home. This automated prescription ordering system will be available to

all physicians of the Metropolis Health System.

The direct prescription ordering system will serve to entice Sample General Hospital’s

patients to stay within the organization for their prescription needs. Although several major retail

chains like Wal-Mart, Target, Safeway, and Kmart have added pharmacy services to their stores,

the convenience of having the physician order the medication directly will serve as a reason to

utilize Sample Pharmacy. Automatic follow up refill service can also be arranged by the patient

either directly with the physician or the pharmacy.

Operations

Sample Pharmacy will be open six days a week; eight hours daily from Monday through

Friday, and four hours on Saturdays. It will be closed on Sundays. A pharmacist together with a

pharmacy technician will be on duty the entire time the pharmacy is open for business to

dispense prescriptions. This will require 1.1 FTEs for each of the positions, the pharmacist and

pharmacy technician. An additional 0.5 FTE for a delivery employee will also be employed on a

part time basis.

The pharmacist will have full authority for all the daily managerial duties required by the

pharmacy. Under the current structure, the pharmacist will report directly to the director of

Sample General Hospital, Dr. Rick Sebastian. Dr. Sebastian will work to ensure that the vision of

both Sample General Hospital and the Metropolis Health System are maintained.

Facilities

Business Plan 9

Sample Pharmacy will utilize 5,000 square feet of the exterior portion of Sample General

Hospital facing Main Street. This location will allow for additional expansion that can serve the

public without the need of entering through the main hospital. It will also allow the pharmacy to

maintain its own 24-hour entrance once the need to remain open 24 hours per day becomes

necessary. The location will also facilitate additional building area if the need arises in the future

and is suited for displaying its own signage to attract the public.

Information Systems

Hospital Leasing Services has agreed to lease the necessary point of service (POS) system

and desktop computers required by the pharmacy that allows for the seamless integration to

Sample General Hospital’s current information system. The lease amount includes all the

required equipment, cabling, and support and continuous training for the entire staff. Installation

of the entire system, once all cabling is completed during construction, is expected to be less than

30 days.

The Organization

Executives of the Company

Executives of the Company are as follows:

Name Age Position Company

Ronald McDonald 49 Chief Financial Officer Sample General Hospital

Dr. Rick Sebastian 58 Director Sample General Hospital

Arthur King 54 V.P., Finance Metropolis Health System

Executive Profiles

Mr. Ronald McDonald, Chief Financial Officer of Sample General Hospital has been in the

finance healthcare field for over 25 years. Upon obtaining his M.B.A. from Harvard Business

Business Plan 10

School, he was immediately hired as the Controller for Metropolis Health Care. In 1995, he was

promoted to his current position as the CFO of Sample General Hospital.

Dr. Rick Sebastian, Director of Sample General Hospital, graduated from University of

California Los Angeles Medical School. Upon his graduation, he moved to New York for his

residency at St. Claire’s Hospital. He was recruited to Sample General Hospital when it was first

opened in 1975. He has been the Director since.

Arthur King, V.P. of Finance for Metropolis Health System graduated from the University

of San Francisco with a B.A. in Accounting. He received his CPA within a year from graduation

and worked at Oak General Hospital for 5 years as their Controller. He made his move to

Metropolis Health System immediately after working at Oak General Hospital.

Officer Compensation

All officer compensation for the above officers will be handled by the Metropolis Health

System and Sample General Hospital. For each of the officers’ involvement with Sample

Pharmacy, compensation will be paid in the amount of $50,000 annually.

Supporting Professionals

Accountants/Auditors Deloitte & Touche

123 Main Street

Metropolis, CA 91234

Attorneys Smith, Smith, Jones and Jones

345 Oak Street

South Metropolis, CA 91235

Key Risks/Time Line

Business Plan 11

Key Risks

Other drug stores undercutting prices may pose a risk to Sample Pharmacy’s ability to

charge full-price on the pharmaceuticals. With the aid of Metropolis Health Care’s volume

purchasing power, Sample Pharmacy could adjust prices to stay competitive in the market. With

the innovative connectivity between the physician and the pharmacy, it is possible that this risk

may not be as threatening to the bottom line of the pharmacy.

Time Line

Milestone Target Date Status

Pharmacy Construction October 2009 Not Started

Inventory Delivery January 2009 Not Started

IT Installation January 2009 Not Started

Pharmacist Hiring November 2009 Not Started

Employee Hiring December 2009 Not Started

Prospective Financials

Assumptions

Annual Prescription Estimates

Proven estimates expect that in Year 1, 225 prescriptions will be dispensed per day

(55,350 annually) with a 2.0% increase for Year 2, 230 prescriptions per day (56,457 annually),

and in Year 3, with a 3.0% increase, it is expected to be 236 prescriptions per day (58,151

annually).

Average Net Revenue per Prescription

Expected net revenue per prescription for Year 1 is $46.75, Year 2 is $47.69 and Year 3 is

$48.64.

Business Plan 12

Bad Debt Percentage

Bad debt percentage is calculated at 1.0%.

Inflation Rates

Expected inflation rates for Salaries and Wages is 3.0%, Other than Prescriptions is 2.0%

and Benefits as a percentage of Salaries is 20%.

Special Equipment, Training and Costs

Training for the new POS system will be included in the IT package lease. This is

scheduled to commence on February, 2009 after the entire IT installation has occurred.

Cost of Supplies, Drugs, and/or Devices

Since vendors finance the cost of drugs for 60 days, the costs of drugs are basically

financed by the accounts payable (AP) cycle. The initial supply inventory is expected to be

approximately $10,000.

Labor Requirements and Costs

The pharmacy will be open for 8 hours daily from Monday through Friday and 4 hours on

Saturday. Staffing requirements will require 1.1 FTEs for pharmacy technicians, 1.1 pharmacist

FTEs and 0.5 FTE for delivery personnel for a total of 2.7 FTEs. The cost of staffing has been

estimated at $16,000 per month for Salaries and Wages, with a burden of $3,200 per month for

Benefits.

Balance Sheets

Sample Pharmacy projects an ending cash balance for Year 1 at $73,597, Year 2 at

$376,607, and Year 3 at $737,490.

Income Statements

Business Plan 13

Net income before taxes is projected at $238,053 for Year 1, $287,676 for Year 2, and

$345,550 for Year 3.

Cash Flow Statements

Based on current projections, Sample Pharmacy should begin to recognize a positive cash

flow situation as early as Month 10 of Year 1.

An additional revenue stream can later be adopted by allowing the pharmacy to sell over-

the-counter medication. Profits for this portion of the business may not be as much as the

pharmacy but could help enhance revenue without any effect on the fixed costs of the pharmacy.

Minimal additional space would be required to display the additional products available for sale

and no additional manpower would be required.

Business Plan 14

References

Baker, J. J., & Baker, R. W. (2006). Health Care Finance. Sudbury, MA: Jones and Bartlett

Publishers.