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Francis Healthcare Business Pian Outpatient Diagnostic Center St Francis is a regional health system with over 500 employed physician partners, six...

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St. Francis Healthcare Business Pian — Outpatient Diagnostic Center St Francis is a regional health system with over 500 employed physician partners, six hospitals and
60 facilities throughout 30 northern Georgia and southern Tennessee communities. They are
committed to being a top integrated health care provider and continuously work to make life better
for the people, families and communities they serve. As an integrated health care provider, they provide exceptional, coordinated health care that spans
four core service divisions: hospital-based services, clinic-based services, post-acute care and retail
services, and a wholly owned insurance company. These four core service divisions make up their
comprehensive, vertically integrated delivery system, and integrated delivery is what makes St
Francis Healthcare unique in serving the full range ofhealth care needs for their patients. St Francis offers over 85 specialty and subspecialty services, including orthopedic surgery, prehospital
emergency services and training, neurosurgery, heart and vascular services, cancer care, plastic and
reconstructive surgery and much more. They are a leader in obstetric, neonatal and pediatric services,
offering the highest level of care available at their neonatal intensive care unit, caring for the most
fragile preemies in the region’s only Small Baby Unit. St. Francis Health’s three outpatient diagnostic centers provide convenient access to some of the
most common outpatient services. Offering advanced technology for same-day screening and
diagnosis, these centers are an extension of their hospitals’ commitment to excellence. 1|Page

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Bank On Us For
' Excellent -' ' Diagnostic Services Like therapeutic services, Medicare has specific coverage requirements for diagnostic services
furnished in hospital outpatient departments. The general coverage rules are similar, but not identical, to the coverage rules. As detailed below, the general coverage rule mandates that diagnostic services
are furnished: 0 Directly or under arrangements by the hospital
I Under the order ofa physician or NPP
0 Under the appropriate level of supervision St Francis expects the market for analytic and diagnostic services continue to grow in the next five
years. Scientific advances will yield new and improved service capabilities and the aging US
population will increasingly require more and better diagnostic imaging services. Additionally,
growing access to healthcare insurance for US citizens will continue to boost demand by making
industry services more affordable for patients. St. Francis is thinking of expanding their diagnostic services by opening a new Diagnostic Center to serve a Community which is 5 miles from any of their
hospitals. The CFO of St Frances has asked you as a Business Analyst to do a 5-year business plan for this new
Outpatient Diagnostic Center. They want to do the following imaging services at the new Outpatient Diagnostic Center: X-rays,
computerized tomography (CT) scans and magnetic resonance imaging (MRI). 2|Page

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Based on the prior experience and the cou'ununity needs, they eslilnate the following volume of
diagnostic exalns by Financial Classl'Payor in the fu'st year of operation. —E_-m-— Medicare Sc Med i-care Managed Care 1 240 1 390 4 930
Medicaid Eu Medicaid Managed Ca re am 240 550 1,390
Managed {3a rejtammercial 4,430 1,7713 3,290 9,491]
Worker's. Compensation 110 30 1313 EDD
Self-Pay 70 30 30 130 Tun-ta L440 331a 5,390 15,140 Based on the current charges at their other diagnostic centers, gross charges for the new services will he as follows:
X-ray $250.00
Ct Scan $650.00
MRI $1,050.00 Based on their current contracts with the different payors, they expect the net revenue per imaging will he as follows: Financial fiassfllawar I—ray CT lulll
Meditate E: Medicare Managed Ca Ire 5 53.00 S 156.01] 5 255.00
Medicaid 8: Medicaid Managed Care 5 54.00 $ 143.00 5 243.00
Managed Care 0; Eammer-cial 5 103.00 S 315.00 5 450.00
Worker's Compensation 5 31.00 $ 233.00 5 350.130
Self—Pay 5 49.00 5 148.00 5 215.00 Operating expenses are estimated as follows: Staffing: 2 Full Time Supervisors at $42.00 an hour, 9 Full Time Technicians/Technologists at $32.00 an
hour, 3 Clerical staff at $22.00 an hour (1 FTE : 2,080 hours per year). Current benefits (including health insurance) are running at 30% of salaries. Other operating expen ses: Supplies $8,000 per month
Rent $20,000 per month
Utilities $10,000 per month Other department expenses $4,000 per month
Other operating expenses are expected to remain fixed for the range of volume in the proj ect‘s 5-year period. Direct Overhead expenses including billing, collection, coding, registration, etc. are estimated to be at $25 per exam. 3|Page

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Corporate office overhead allocations are estimated at 20% of the total department expenses (including direct overhead but excluding depreciation). The capital expenditure for this project are estimated as follows: item. Cost
Digital )Csrev M achine 5 BEHJJIIDDD
MRI Marhine $ 1,300,1IHJLHJ
Construction Cost for MRI Suite 5 450,000.0D
Other Eonstructionffienovation Cost 5 flfiflflflflflfl 1 Tote] lrfitiaiCost sameness Imaging machines have 5 years of useful life. St Francis uses straight-line method to depreciate all imaging
machines and other capital expenses related to installation and renovation of diagnostic centers. The best estimate of the machines net salvage value after the five years of use is $500,000. St. Francis Healthcare"s weighted average cost of capital (WACC) is 12% and is used as their discount rate when budgeting for a new project. It is estimated that the gross charges will increase by 4% per year. It is a growing community and St Francis
management expects that the volume will grow by 2% per annum. Based on their current insurance contracts, the Net Revenue is expected toiucrease by 3% per year. Also, expenses are expected to increase by 4% per year. Using the information given above, you are asked to develop a business plan for this Outpatient Diagnostic center. The business plan should include the following data/ info rmation: 1. a. Gross and Net Patient Service revenue by Financial class/Payor budget for the period of5 years. b. Detail Expense budget for 5 years. c. Income statement for 5 years. d. What is the projectjs payback period? What are the deficiencies of payback method when used as
a project selection criterion? e. What is the project’s NPV at WACC of 12%? What is the payor mix % for Year 1 using gross revenue? Would you recommend opening this new Diagnostic Center? What other factors including internal and external would you consider when doing this business plan? 91:43.93.” There is a rumor that a big national company is also looking to open a free standing diagnostic center
in that area within the next two years. It is estimated that if the new diagnostic center is opened, it will
result in decrease in volume for St. Francis by 5% per year (in year 3-5). Also, Commercial/Managed
Care insurance companies are looking ways to cut their cost by reducing hospital reimbursement. One
way is to index their reimbursement to Medicare. Managed Care/Commercial insurance are considering
paying 150% of Medicare rates starting year 3. Assuming everything else remains the same, show the
impact this will have on net revenue, income statement, payback period and NPV using 12% cost of capital. What would be your recommendation based on the new information? 4|Page

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