REQUESTING CAPITAL AND EXECUTING BUSINESS …...JANE C. KAYE, MBA JANE KAYE HEALTHCARE CONSULTING...
Transcript of REQUESTING CAPITAL AND EXECUTING BUSINESS …...JANE C. KAYE, MBA JANE KAYE HEALTHCARE CONSULTING...
REQUESTING CAPITAL AND EXECUTING BUSINESS PLANS
PRESENTED BYJANE C. KAYE, MBA
JANE KAYE HEALTHCARE CONSULTING [email protected]
732-233-3144
REQUESTING CAPITAL AND EXECUTING BUSINESS PLANSAt the end of the session you should be familiar with:
Topics to consider before purchasing equipment
Gathering information for Finance
The basics of a business plan: Volume Revenue Supply Costs
Capital acquisitions and depreciation
Putting everything together into a Profit and Loss statement
WHY REQUEST CAPITAL
Existing equipment is Old No longer supported by manufacturer Outdated technology Inconsistent results Frequency of servicing
THINGS TO CONSIDER (just like real-life)
Supplies and other disposables (home printer)
Expected life/depreciation (wood vs plastic fence)
Servicing costs (new vs used car)
Construction/Fit-out (garage replacement)
Strategic Plan (where are we headed?)
MORE CONSIDERATIONS Patient safety: was
there a sentinel event
Patient satisfaction
Physician satisfaction or retention
Required by a regulatory agency
Offensive or defensive
Competition
Community perception/marketing
HOW TO READ A QUOTE
Price for capital equipment, discount, trade-in allowance
Outright purchase vs. lease (finance decision – similar considerations to buying a new or leased vehicle)
Price for instruments/accessories/disposables
Sales agreement – Terms & Conditions (T&C), warranty information
WHAT TO DO WITH QUOTE –QUESTIONS TO ASK VENDOR What exactly is included in the quote
How long is the quote good for? Typically 90 – 120 days
What other costs are not included in the quote
How much is annual service and maintenance
What supplies or other purchases are required to use the equipment
Is space fit-out needed
Upgrades for software
Don’t be afraid to negotiate
WHAT FINANCE NEEDS TO KNOW Why do you need it now. Capital committee review?
Price and where you are in negotiations
Plans for existing equipment (i.e. trade-in, sell, scrap)
Impact on volume
Construction needed to install
IT issues – new, and can be significant
Impact on disposables, supplies, staffing, turnaround time
DEFEND YOUR REQUEST: BUILD A BUSINESS PLAN Create a subgroup to evaluate the request
Planning: Is this a new or expanded service
Planning: What assumptions can be made about impact on volume, payer mix
Reimbursement: what is the current reimbursement and will it change
Finance: Gather all known costs for 1-5 years, or 1–3 years
EXAMPLE – Surgical Robot for Prostatectomy Surgeries
Two physicians have requested the purchase of a new robot (replacement) for minimally invasive prostatectomy surgeries.
They operate 2 full days per week with a current surgical volume of 3 cases per day (6 cases per week).
Cost for robot- $2,200,000
Supply cost - $2,000 per surgical procedure
QUESTIONS TO CONSIDER (these impact assumptions)
Is the volume new or existing? (Existing)
What is the likelihood of obtaining the volume? (Highly likely)
Does the volume have a ramp-up? (No)
Will other physicians use the Robot? (Yes)
Do the other physicians know how to use a Robot? (training time)
LET’S REVIEW SOME BASIC TERMS P&L = Profit and Loss Statement
RevenueMinus ExpensesProfit (Bottom Line)
• Conservative, Moderate and Aggressive scenarios Conservative = very likely to attain Moderate = likely to attain Aggressive = stretch/less likely to attain
Proforma = Method of calculating projected financial figures (Investopedia)
ASSUMPTIONS• The P&L is only as reliable as the assumptions used
• There is no single, definitive method for creating assumptions
• Look for reasonableness and focus on volume
• Each new business venture requires a unique approach
• Typical factors to consider New or existing service
Prior experience at your facility
Physician involvement/dynamics
LET THE NUMBERS SING
VOLUME: ITERATION #1
Always assume Conservative Moderate Aggressive
Days robot in service
Cases per day
Cases per
week
Cases per
month
Cases per year
a b a*b=c c*4=d d*12
Conservative 2 2 4 16 192
Moderate 2 3 6 24 288
Aggressive 2 4 8 32 384
Start with volume assumption
Volume drives revenue
VOLUME: ITERATION #2
Days robot in service
Cases per day
Cases per
week
Cases per
month
Cases per year
a b a*b=c c*4=d d*12
Conservative 2 2 4 16 192
Moderate 3 3 9 36 432
Aggressive 4 4 16 64 768
If we’re spending $2.2 million on a robot, shouldn’t it be in service more than 2 days per week?
VOLUME: ITERATION #3
Days robot in service
Cases per day
Cases per
week
Cases per
month
Cases per year
a b a*b=c c*4=d d*10
Conservative 2 2 4 16 160
Moderate 3 3 9 36 360
Aggressive 4 4 16 64 640
Plan for physician vacations - assume 10 months per year, not 12
VOLUME: Ramp-Up Example Always assume ramp-up for new volume
Look to prior experience and common sense to create ramp-up assumptions
Example of ramp-up over 12 months
Month 1 2 3 4 5 6 7 8 9 10 11 12
Conservative 2 2 2 4 4 6 6 8 10 12 14 16
Moderate 4 4 4 8 8 12 12 16 18 20 22 24
Aggressive 12 12 12 16 16 20 20 24 26 28 30 32
REVENUE PER CASE
Medicare is a good starting point
Never assume all amounts will be collected
Conservative assumption: reduce revenue to 95%
Estimated Medicare Payment Rate $7,800Percent collected 95%Collectible Revenue $7,410
Cases Per Year
Collectible Revenue per Case
Estimated Revenue per Year
Conservative 160 $7,410 $1,185,600
Moderate 360 $7,410 $2,667,600
Aggressive 640 $7,410 $4,742,400
PAYER MIX
The Medicare approach assumes Medicare payment is a reasonable average
With high Medicaid or self pay this approach will overstaterevenue
With managed care contracts or unusual (high) reimbursement rates this approach may understate revenue
Does the payer mix materially change the revenue?
The Reimbursement department should be able to give you rates for each payer
IMPACT OF PAYER MIX -Conservative
CONSERVATIVE: ($33,000) revenue reduction
PAYERREVENUE PER CASE
PAYER MIX
CASES PER YEAR
PROJECTED REVENUE
CONSERVATIVEMedicare $7,410 70% 112 $829,920Medicaid (80% of Medicare) $5,928 10% 16 $94,848Managed Care (120% of Medicare) $8,892 15% 24 $213,408Self Pay (25% of Medicare) $1,853 5% 8 $14,820TOTAL 160 $1,152,996Revenue Based on Medicare $1,185,600Reduction In Revenue Assumption ($32,604)
IMPACT OF PAYER MIX - Moderate
MODERATE: ($73,000) revenue reduction
PAYERREVENUE PER CASE
PAYER MIX
CASES PER YEAR
PROJECTED REVENUE
MODERATEMedicare $7,410 70% 252 $1,867,320Medicaid (80% of Medicare) $5,928 10% 36 $213,408Managed Care (120% of Medicare) $8,892 15% 54 $480,168Self Pay (25% of Medicare) $1,853 5% 18 $33,345TOTAL 360 $2,594,241Revenue Based on Medicare $2,667,600Reduction In Revenue Assumption ($73,359)
IMPACT OF PAYER MIX - Aggressive
AGGRESSIVE: ($130,000) revenue reduction
PAYERREVENUE PER CASE
PAYER MIX
CASES PER YEAR
PROJECTED REVENUE
AGGRESSIVEMedicare $7,410 70% 448 $3,319,680Medicaid (80% of Medicare) $5,928 10% 64 $379,392Managed Care (120% of Medicare) $8,892 15% 96 $853,632Self Pay (25% of Medicare) $1,853 5% 32 $59,280TOTAL 640 $4,611,984Revenue Based on Medicare $4,742,400Reduction In Revenue Assumption ($130,416)
WHAT ARE ALL THE COSTS?Use the same approach as the revenue estimate:
Reasonable estimate
Based on prior experience if known
Work with Materials Management Department
Supply costs are typically a percent of revenue or dollars per case
How material are the cost components
Assume supplies = $2,000 per case
SUPPLIES
Cases per Year
Supply Costs per
Case
Estimated Supply Costs
Estimated Revenue
Supplies as % of
Revenue
Conservative 160 $2,000 $320,000 $1,185,600 27%
Moderate 360 $2,000 $720,000 $2,667,600 27%
Aggressive 640 $2,000 $1,280,000 $2,742,400 27%
DEPRECIATION Investopedia: Depreciation
indicates how much of an asset’s value has been used up
Depreciation is a method of allocating the cost of an asset over its useful life
Useful life is how long the asset will be useful to the business, not how long the asset will actually last
SAMPLE DEPRECIATION CALCULATION
Depreciation = Cost divided by Useful Life
Depreciation is a non-cash expense
Half-Year Convention: Treats all property acquired during the year as being acquired exactly in the middle of the year
Purchase price $2,200,000 Life (years) 7 Yearly Depreciation $314,286 1/2 Year Convention 0.50 Year 1 Depreciation $157,143
PUT IT ALL TOGETHERProforma P&L with 3 volume assumptions using Medicare revenue
DA VINCI ROBOTPROFORMA PROFIT AND LOSS STATEMENT ‐ YEAR 1 ONLY
Using Medicare to Estimate Revenue
CONSERVATIVE MODERATE AGGRESSIVE
Revenue (Medicare) $1,185,600 $2,667,600 $4,742,400cases 160 360 640
Supplies ($2k per case) 320,000 720,000 1,280,000 Depreciation 157,143 157,143 157,143 Total Expenses 477,143 877,143 1,437,143
Profit (Loss) $708,457 $1,790,457 $3,305,257
PUT IT ALL TOGETHERProforma P&L with 3 volume assumptions using Payer Mix revenue and supplies as a % of revenue
DA VINCI ROBOTPROFORMA PROFIT AND LOSS STATEMENT ‐ YEAR 1 ONLY
Using Payer Mix to Estimate Revenueand Supplies as % of RevenueCONSERVATIVE MODERATE AGGRESSIVE
Revenue (Payer Mix) $1,152,996 $2,594,241 $4,611,984cases 160 360 640
Supplies (27% of Revenue) 311,309 700,445 1,245,236 Depreciation 157,143 157,143 157,143 Total Expenses 468,452 857,588 1,402,379
Profit (Loss) $684,544 $1,736,653 $3,209,605
5 YEAR PROJECTION – Accrual Basis Moderate volume
3% rate increase Years 2-3; 1% increase Years 4-5 (Reimbursement Department)
5% supplies increase Year-Over-Year (y-o-y). (Purchasing Department)
Year 1 Year 2 Year 3 Year 4 Year 5
Revenue $2,667,600 $2,747,628 $2,830,057 $2,858,357 $2,886,941 cases 360 360 360 360 360
Supplies $720,000 $756,000 $793,800 $833,490 $875,165 Depreciation $157,143 $314,286 $314,286 $314,286 $314,286 Total Expenses $877,143 $1,070,286 $1,108,086 $1,147,776 $1,189,450 Total Profit (Loss) $1,790,457 $1,677,342 $1,721,971 $1,710,582 $1,697,491 Cumulative Profit (Loss) $3,467,799 $3,399,313 $3,432,553 $3,408,072
5 YEAR PROJECTION – Cash Basis Cash basis financials show cash outlays for capital
purchases instead of depreciation
Year 1 Year 2 Year 3 Year 4 Year 5
Revenue $2,667,600 $2,747,628 $2,830,057 $2,858,357 $2,886,941 cases 360 360 360 360 360
Supplies $720,000 $756,000 $793,800 $833,490 $875,165 Depreciation $157,143 $314,286 $314,286 $314,286 $314,286 Total Expenses $877,143 $1,070,286 $1,108,086 $1,147,776 $1,189,450 Total Profit (Loss) $1,790,457 $1,677,342 $1,721,971 $1,710,582 $1,697,491 Add Back Depreciation $157,143 $314,286 $314,286 $314,286 $314,286 Subtract Capital Cost $(2,200,000)Cash Basis Profit (Loss) $(252,400) $1,991,628 $2,036,257 $2,024,867 $2,011,776 Cumulative Profit (Loss) $1,739,228 $4,027,885 $4,061,124 $4,036,644
OTHER COSTS
Staffing
Benefits
Education, training, travel
Office costs and other expenses
Utilities and other occupancy costs
Inpatient Stay (need cost accounting information)
Preadmission Testing
Ancillary services (i.e. lab work, radiology)
Fixed vs variable costs
Depending on the project, other costs can include:
TAKE AWAY Work collaboratively to create a business plan
Be prepared to answer – or investigate– questions related to volume, revenue and costs
Have fun, and remember …
LET THE NUMBERS SING
REQUESTING CAPITAL AND EXECUTING BUSINESS PLANS
PRESENTED BYJANE C. KAYE, MBA
JANE KAYE HEALTHCARE CONSULTING [email protected]
732-233-3144