23 Feb The volume of patient visits is estimated to be 100,000 for the current year. This estimation is based on the average number of patient visits in the previous year and takes into account any
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Health 305: Healthcare Finance & Budgeting
Assignment 2: Operating Budget
Total Points: 46/80
Grader Notes:
You need to use assumptions such as no of patients, revenue per patient, etc to calculate the expected income. You have just included a cursory view of the calculations. You should cite proper references for the same. Use proper tables for the revenue as well as the budget.
The operating budget also links to the assumptions of the statistical report and you calculate the expenses based on that. You have just provided the line items. You need to include how you calculated the revenue, expenses, labor detail, etc. Provide in a proper table format.
IRR and NPV need to be calculated based on cash flows for the future. You have described them but have not provided proper calculations.
Your recommendations need to be backed up by the calculations.
The presentation needs to be professional.
Healthcare Finance & Budgeting Report
Students Name
Institution Affiliation
Course Number/Date
Lecturers Name
Due Date
Healthcare Finance & Budgeting Report
This report provides a statistical analysis of the healthcare organization’s operating budget for the current year. The data includes the volume of patient visits, revenues, and expenses. The report also provides assumptions used to justify the volumes, revenues, and expenses.
Volume of patient visits:
The volume of patient visits is estimated to be 100,000 for the current year. This estimation is based on the average number of patient visits in the previous year and takes into account any changes in patient demographics, population growth, and healthcare trends.
Revenues:
Revenue is expected to be $10 million for the current year, with the following breakdown:
Medicare: 40% of total revenue or $4 million
Medicaid: 20% of total revenue or $2 million
Commercial Insurance: 30% of total revenue or $3 million
Self-Pay: 10% of total revenue or $1 million
The revenue breakdown is based on the average reimbursement rates for each type of insurance and self-pay in the previous year. The assumptions take into account any changes in reimbursement rates and any changes in the patient mix.
Expenses:
Expenses are expected to be $9 million for the current year, with the following breakdown:
Labor: 40% of total expenses or $3.6 million
Equipment: 20% of total expenses or $1.8 million
Supply: 25% of total expenses or $2.25 million
Overhead: 15% of total expenses or $1.35 million
The expense breakdown is based on the average expenses for each category in the previous year and takes into account any changes in the cost of labor, equipment, supplies, and overhead.
Assumption:
In conclusion, this report provides a comprehensive analysis of the healthcare organization’s operating budget for the current year. The volume of patient visits, revenues, and expenses are estimated based on previous year data and take into account any changes in patient demographics, reimbursement rates, and cost trends (Anessi-Pessina et al., 2020). The organization is expected to have a positive financial performance with revenue exceeding expenses by $1 million.
Create a 3 year operating budget incorporating:
Estimation of the yearly income
Estimation of yearly expenses
A three-year operating budget can be prepared to help forecast the financial performance of a primary care medical practice over a three-year period. The budget should include a revenue and expenses estimation per year. Here is an example of a three-year operating budget:
Year 1:
Revenue:
Medicare: $500,000
Medicaid: $250,000
Commercial Insurance: $400,000
Self-Pay: $100,000
Total Revenue: $1,250,000
Expenses:
Labor: $400,000
Equipment: $100,000
Supply: $150,000
Overhead: $200,000
Total Expenses: $850,000
Year 2:
Revenue:
Medicare: $550,000
Medicaid: $300,000
Commercial Insurance: $450,000
Self-Pay: $125,000
Total Revenue: $1,425,000
Expenses:
Labor: $450,000
Equipment: $110,000
Supply: $175,000
Overhead: $225,000
Total Expenses: $960,000
Year 3:
Revenue:
Medicare: $600,000
Medicaid: $325,000
Commercial Insurance: $500,000
Self-Pay: $150,000
Total Revenue: $1,575,000
Expenses:
Labor: $500,000
Equipment: $120,000
Supply: $200,000
Overhead: $250,000
Total Expenses: $1,070,000
The calculation of the cash flow (whether it will be negative or positive) based on the estimated revenues and expenses.
The cash flow generated from the revenues and expenses can be determined by subtracting the total expenses from the sum of revenue in each year. If the result is positive, it means that the practice is generating a positive cash flow, meaning it has enough cash to pay its bills and make investments (Heald & Hodges, 2020). If the result is negative, it implies that the practice is generating a negative cash flow and will need to find additional sources of funding to sustain operations.
To calculate the cash flow generated from revenues and expenses, we need to subtract the total expenses from the total revenue for each year.
Year 1: Cash Flow = Total Revenue – Total Expenses = $1,250,000 – $850,000 = $400,000 (positive)
Year 2: Cash Flow = Total Revenue – Total Expenses = $1,425,000 – $960,000 = $465,000 (positive)
Year 3: Cash Flow = Total Revenue – Total Expenses = $1,575,000 – $1,070,000 = $505,000 (positive)
In this scenario, the primary care medical practice generates a positive cash flow for each year of the three-year operating budget.
Create a budget for the initial capital for your project, including a list of equipment you may require, along with their costs and the yearly amount of depreciation
In addition to the operating budget, a start-up capital budget can be prepared to outline the costs associated with setting up a primary care medical practice. This budget will include the equipment and other capital expenditures needed to start the practice. Here is an example of a start-up capital budget:
Equipment:
Exam tables: $5,000 (2 units)
Computers: $4,000 (2 units)
Medical equipment: $10,000 (1 unit)
Furniture: $3,000
Total Equipment Cost: $22,000
Annual Depreciation:
Exam tables: $2,500
Computers: $2,000
Medical equipment: $5,000
Furniture: $1,500
Total Annual Depreciation: $11,000
Determine the following from your operating budget:
Estimated cash flow for a period of three years
Determining the point of profitability
Calculating the internal rate of investment return
Determining the present value of investment returns
From the operating budget, several financial metrics can be calculated to determine the viability of the primary care medical practice.
Projected Cash Flow: The cash flow can be determined through subtraction of the total expenses from the sum of revenue in each year. This will give an idea of the amount of cash generated by the practice and can help determine if there is enough cash to cover operating expenses and make investments.
Here is the calculation:
Year 1: $1,250,000 – $850,000 = $400,000
Year 2: $1,425,000 – $960,000 = $465,000
Year 3: $1,575,000 – $1,070,000 = $505,000
So, the projected cash flow for the three years is $400,000, $465,000, and $505,000, respectively.
Break-Even Analysis: It determines the number of patient visits required to cover all the operating expenses of the practice. This could be calculated by dividing the sum of fixed costs by the difference between variable costs and revenue. Once the break-even point is reached, the practice will start generating a profit.
Here is the calculation:
Total expenses = $850,000 Total revenue = $1,250,000
So, the break-even point occurs when the total revenue equals $850,000.
Internal Rate of Return (IRR): IRR is a financial metric that measures the rate of return for an investment. In this case, the IRR can be calculated for the primary care medical practice by taking into account the initial investment, projected cash flows, and the required return rate. A high IRR implies that the investment is anticipated to generate a high return and is considered a good investment (Sparkes et al., 2019). To calculate IRR, we need to consider the cash flows for the three years and the initial investment.
Net Present Value (NPV): NPV is a financial metric that measures the present future cash flows value generated by an investment. In this case, the NPV can be calculated for the primary care medical practice by taking into account the initial investment, projected cash flows, and the required return rate. A positive NPV implies that the investment is anticipated to generate positive cash flows and is considered a good investment. To calculate NPV, we need to consider the cash flows for the three years, the discount rate, and the initial investment.
Assess the financial risk associated with this project based on your calculations, and provide a recommendation on whether the project is financially feasible.
Financial Risk:
According to the net present value calculations, internal return rate, break-even analysis, and projected cash flow, it can be evaluated whether the project is financially viable. A positive cash flow and NPV indicate that the project is financially viable and generates a positive return on investment. On the other hand, a negative NPV and a low IRR indicate that the project may not be financially viable and may carry a higher financial risk (Jakovljevic et al., 2019). In conclusion, a thorough analysis of the financial performance and the financial risk involved is essential to make a sound recommendation on whether the project is financially viable.
Write a minimum of 1000 words report that summarizes your findings financially and offers suggestions. Additionally, you must include relevant supporting documents to back up your conclusions and suggestions.
Executive Summary
The financial private primary care viability medical practice with a single physician provider is a critical factor to evaluate before investing. Financial metrics, such as net present value (NPV), internal rate of return (IRR), break-even analysis, and projected cash flow are used to determine financial viability. The projected cash flow should consider the estimated revenue and expenses over the next three years and the revenue from self-pay, commercial insurance, Medicaid, and Medicare. The break-even analysis computes the point whereby the revenue is equal to the expenses, and if the IRR is high, it indicates a profitable investment. The NPV measures the present value of future cash flows; if positive, it is a good indicator of financial viability. Assumptions for calculating revenue and expenses should be based on market research and justified in the report. The market competition level should also be considered, as well as the start-up and operating budgets. The equipment cost and expenses should be analyzed concerning the estimated revenue to ensure their sustainability and impact on the project’s financial viability.
Introduction
As someone considering investing in a private medical practice primary care with a single physician provider, I understand that the project’s financial viability is a crucial factor to evaluate. Several financial metrics can help determine financial viability, including the net present value (NPV), internal rate of return (IRR), break-even analysis, and projected cash flow.
Starting with the projected cash flow, I need to consider the estimated revenue and expenses over the next three years. It is important to analyze the revenue from Medicare, Medicaid, commercial insurance, and self-pay concerning the expected expenses. If the cash flow is positive, it means that the revenue generated from the project is greater than the expenses, making it a financially viable option (Lomas et al., 2018). On either hand, if the cash flow is negative, the expenses are greater than the revenue, and the project may not be financially viable.
The break-even analysis is another crucial factor in evaluating the project’s financial viability. This analysis calculates the point at which the revenue generated from the project is equal to the expenses. If the break-even point is reached within three years, the revenue generated is sufficient to cover the expenses, making the project financially viable. However, if the break-even point is not reached within three years, it may suggest that the project is not financially viable.
The IRR is a measure of the profitability of an investment over time. If the IRR is high, it indicates that the investment is generating high returns concluding that it is financially viable. On either hand, if the IRR is low, the investment may not generate high returns as well as might not be financially viable. In this project, it is important to consider the IRR as a critical factor in evaluating financial viability.
The NPV is another important metric in evaluating the project’s financial viability. It measures the present value of the future cash flows from the project. If the NPV is positive, the present value of the future cash flows is greater than the initial investment, making it a good indicator of financial viability. On the other hand, if the NPV is negative, it suggests that the future cash flows present value is less compared to the initial investment, and also the project may not be financially viable.
In addition to the financial metrics mentioned above, I need to consider the assumptions in calculating the revenues and expenses. These assumptions should be based on market research and industry standards and should be justified in the report. Any significant changes to these assumptions may impact the project’s financial viability.
I also need to consider the competition in the market and its potential impact on the project’s financial viability. I must analyze the number of primary care providers in the area and the pricing of services offered by competitors to determine their potential impact on the project’s financial viability.
Regarding the start-up capital budget, I need to consider the cost of equipment needed for the project and its annual depreciation. I must analyze the equipment cost concerning the estimated revenue to determine if the investment is financially viable. If the equipment cost is high compared to the estimated revenue, the project may not be financially viable.
On the operating budget, I need to consider the estimated expenses and their profitability and cash flow impact. I must analyze the expenses concerning the estimated revenue to determine if they are reasonable and sustainable. Any significant increase in expenses may impact the financial viability of the project.
Statistical Summary of the Findings
The following statistics mathematically summarizes the above findings while providing appropriate recommendations.
Year 1 Depreciation:
Exam tables: $5,000 / 5 years = $1,000 per year Computers: $4,000 / 5 years = $800 per year Medical equipment: $10,000 / 5 years = $2,000 per year Furniture: $3,000 / 5 years = $600 per year
Year 1 Total Depreciation: $1,000 + $800 + $2,000 + $600 = $4,400
Year 2 Depreciation:
Exam tables: $5,000 / 5 years = $1,000 per year Computers: $4,000 / 5 years = $800 per year Medical equipment: $10,000 / 5 years = $2,000 per year Furniture: $3,000 / 5 years = $600 per year
Year 2 Total Depreciation: $1,000 + $800 + $2,000 + $600 = $4,400
Year 3 Depreciation:
Exam tables: $5,000 / 5 years = $1,000 per year Computers: $4,000 / 5 years = $800 per year Medical equipment: $10,000 / 5 years = $2,000 per year Furniture: $3,000 / 5 years = $600 per year
Year 3 Total Depreciation: $1,000 + $800 + $2,000 + $600 = $4,400
This start-up capital budget lists the equipment and costs needed to start the primary care medical practice. It also includes the annual depreciation of each item, which is calculated by dividing the number of years cost over which it will be depreciated (5 years in this case). The total depreciation for each year is calculated by adding the depreciation of each item.
References
Anessi-Pessina, E., Barbera, C., Langella, C., Manes-Rossi, F., Sancino, A., Sicilia, M., & Steccolini, I. (2020). Reconsidering public budgeting after the COVID-19 outbreak: key lessons and future challenges.?Journal of Public Budgeting, Accounting & Financial Management,?32(5), 957-965.
Heald, D., & Hodges, R. (2020). The accounting, budgeting and fiscal impact of COVID-19 on the United Kingdom.?Journal of Public Budgeting, Accounting & Financial Management,?32(5), 785-795.
Jakovljevic, M., Jakab, M., Gerdtham, U., McDaid, D., Ogura, S., Varavikova, E., … & Getzen, T. E. (2019). Comparative financing analysis and political economy of noncommunicable diseases.?Journal of medical economics,?22(8), 722-727.
Lomas, J., Claxton, K., Martin, S., & Soares, M. (2018). Resolving the ??cost-effective but unaffordable?? paradox: estimating the health opportunity costs of nonmarginal budget impacts.?Value in Health,?21(3), 266-275.
Sparkes, S. P., Bump, J. B., Özçelik, E. A., Kutzin, J., & Reich, M. R. (2019). Political economy analysis for health financing reform.?Health Systems & Reform,?5(3), 183-194.
This course explores healthcare specific financial policies and issues, analytical framework and economic transformation for financial decisions (such as investment and working capital), methods of financial management, insurance coverage and financing. In addition, the course focuses on the ability to apply economic and population health models to address health service issues and problems.
You will use the knowledge gained in this course to financially structure and evaluate the opening of a private primary care medical practice with one physician provider. You will prepare an operating and capital budget as well as a narrative summary of at least?1,000 words?to show your financial findings and recommendations. You will provide supporting documentation to support your findings and recommendations.
Prior to writing your narrative summary you will need to prepare an operating and capital budget for the project. The well-prepared operating and capital budgets will demonstrate a keen knowledge of the market, pricing, activity, revenues, expenses, and potential impact on cash-flow and/or profitability. The capital budget will similarly demonstrate an awareness of the capital items and associated costs for project start-up.
Prepare an annual statistical report that includes the following:
Volume of patient visits
Revenues (percentage of reimbursement from Medicare, Medicaid, Commercial Insurance and Self Pay)
Expenses (Labor, Equipment, Supply, Overhead)
Provide your assumptions to justify all volumes, revenues and expenses
Prepare a three-year operating budget that includes the following:
An estimate of revenue each year
An estimate of expenses for each year
The cash flow (negative or positive) generated from revenues and expenses
Prepare a start-up capital budget listing the equipment you may need for this project including the cost and annual depreciation
From your operating budget calculate the following:
Projected cash flow over 3 years
Break-even analysis
Internal rate of return (IRR)
Net present value (NPV)
From your calculations, evaluate the financial risk involved with this project and make a recommendation as to whether this project is financially viable.
Prepare a?1000-word minimum?narrative summary of your financial findings and recommendations. You will provide supporting documentation to support your findings and recommendations.
