Help me study for my Accounting class. I’m stuck and don’t understand.
ASK: I’ve already started this work? Please see attached excel spreadsheet. I’m wondering if my scenario I made up and the work I’ve already done help? If yes, please build off of it. If not, feel free to scrap and approach it in a different way.
Scenario Story: Denver Health Hospital (DH) is located in Denver, Colorado. Like most hospitals in the country, DH saw a significant reduction in revenue with the onset of COVID-19. Due to restrictions put in place to ration healthcare services and delay elective care, overall revenue took a significant dip. Below is a chart that shows utilization changes from March – July 2020 for all Colorado hospitals and Denver Health’s charting looks comparable.
As a consultant, your role is to provide a recommendation to the governing board. You determine that there are two main options for improving the revenue generation of Denver Health Primary Care.
- Telemedicine Services
- Clinic Acquisition
Developing Telemedicine Services will allow existing staff to be repurposed for other income generating activities. This option would allow Denver Health Primary Care to continue to retain existing staff and increase patient revenue.
The Denver Metro area has been hit unevenly by the COVID pandemic with much lower rates of cases in wealthier suburbs. As such, clinics in those regions have not been hit as hard by loss of revenue and continue to generate positive margins in the primary care space. Acquiring a clinic in a wealthy suburb would not only bring in additional revenue, but it would allow Denver Health to expand their system reach and diversify their patient populations.
Denver Health is allotting $5 million dollars for each proposal. Please evaluate the financial benefit of each option and decide whether Denver Health should pursue one of these ventures for increasing revenue of their primary care services. Additionally, debt rates are at historic lows. If both options are profitable by your analysis, would it be beneficial to do both options with additional financing through debt.
- As a non-profit entity, Denver Health’s tax rate is 0%.
- The expected cost of equity is 10% from a similar for-profit hospital.
- The average debt rate for long-term government bonds is 6%.
- The initial setup cost for telemedicine services is $2.7 million and the contract will last 10 years.
- An additional $100,000 is needed for equipment (cameras, microphones).These items have a 10-year life with no salvage value.
- Telemedicine visits will be conducted by 10 providers, 6 days a week, 50 weeks a year for at total operating period of 300 days per year. Each provider will be able to perform 3 telehealth visits in addition to their regular clinic schedule. Net revenue per visit is expected to be $100 and is expected to increase 5% per year.
- Physician and nursing salaries would not change with the addition of telehealth services and are therefore not included in these projections.
- A clinical coder will need to review each visit for documentation at an average cost of $20 per visit.
- A maintenance contract with the telemedicine firm will be a fixed $100,000 per year in the first year and increase 5% per year.
- The owners of the Highland’s Ranch Clinic have placed a best and final purchase price at $5 million.
- The clinic currently has $15 million of debt outstanding.
- Net revenues are projected to be $15 million with a growth rate of 3% for the next 5 years and 5% after that.
- Cash Expenses are projected to be $13 million with a growth rate of 3% for the next 5 years and 5% after.
- Depreciation and interest expense are both fixed at $2 million annually.
Given these assumptions, please make the value calculations for the telemedicine setup and the merger and describe the risks and benefits of both. Secondly, evaluate if utilization of pure debt financing is a good option to make both investments.
- Analysis – financial and strategic analysis of decision options
- Recommendation – recommended choice with explanation of decision rationale
- Projected outcome – how implementation of this recommendation will impact the organization’s financial position – HINT: a pro forma set of financial statements for the organization with a “before” and “after” would be a good idea here