Although Financial Data Are Sketchy An Estimate From A Const

4 Although Financial Data Are Sketchy An Estimate From A Constructio

Although financial data are sketchy, an estimate from a construction company indicates that adding bed capacity would cost about $100,000 per bed. In addition, the rate charged for hernia surgery varies between about $900 and $2,000 (U.S. dollars), with an average rate of $1,300 per operation. The surgeons are paid a flat $600 per operation. Due to all the uncertainties in government health care legislation, Shouldice would like to justify any expansion within a five-year time period. How would you do that?

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In evaluating the potential expansion of Shouldice Hospital amid uncertain and sketchy financial data, it is essential to develop a comprehensive financial justification based on available estimates, operational considerations, and risk analysis. Given the construction cost estimate of approximately $100,000 per bed and the variable but average charge of $1,300 per hernia operation, a structured approach can be employed to justify the expansion within a five-year horizon.

Firstly, estimating the incremental revenue generated by adding new beds is critical. Assuming an occupancy rate and procedure volume, revenue calculations can be made. For example, if each bed facilitates the performance of 200 hernia surgeries annually, then the revenue per bed annually would be 200 surgeries × $1,300 = $260,000. Over five years, this amounts to $1.3 million per bed, assuming consistent surgery rates and charges. However, considering possible fluctuations, a conservative estimate might reduce this figure to account for potential variability.

Secondly, the cost of adding a bed—$100,000—must be balanced against the incremental revenue and operating expenses. The surgeon’s flat rate of $600 per operation directly impacts the variable costs, which are additive to fixed costs such as the construction investment. Other variable costs, such as anesthesia, nursing, and supplies, must also be incorporated for a complete analysis, but for simplicity, focusing on the known figures provides a starting point.

Operationally, the expected profit per surgery can be approximated by subtracting surgeon wages and other variable costs from revenue. If the surgeon wage is $600 per surgery, and assuming other variable costs are, say, $300 per surgery, then the contribution margin per surgery would be $1,300 - ($600 + $300) = $400. Multiplied by the expected number of surgeries per bed annually (200), the annual gross profit per bed would be approximately $80,000. Over five years, gross profit totals about $400,000 per bed, which surpasses the initial construction investment, indicating a potentially favorable return.

However, the uncertainties inherent in healthcare legislation, reimbursement rates, and market demand warrant a sensitivity analysis. For instance, if government policies reduce reimbursement rates or impose additional regulations, revenue could decline, extending the payback period or turning the project unprofitable. Conversely, increased demand or higher charges could enhance profitability.

To mitigate these risks, Shouldice should conduct scenario planning, modeling best-case, most likely, and worst-case outcomes. A discounted cash flow (DCF) analysis can be performed to determine the net present value (NPV) of the investment, incorporating the time value of money, inflation, and potential policy shifts. For example, assuming a discount rate of 8%, and using conservative revenue estimates, the NPV calculation will reveal whether the investment is justified over five years.

Moreover, non-financial factors such as reputation, patient outcomes, and strategic positioning must also be considered. An expanded capacity could improve access, reduce waiting times, and enhance the facility's competitiveness, which are valuable intangible benefits.

In conclusion, despite the limited and uncertain financial data, a combination of conservative revenue estimates, cost analysis, scenario planning, and discounted cash flow modeling provides a robust framework to justify expansion within five years. Shouldice should also monitor legislative developments continuously and remain flexible to adapt its plans accordingly. This strategic analytical approach ensures that expansion decisions are grounded in financial reality while accounting for policy uncertainties.

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