University of virginia health system case study solution

Approved Logo 1 Sept 2013

BNFN 4304 – Financial Policy

Mr. Masood Aijazi

Case 28: University of Virginia Health System: The Long-Term Acute Care Hospital Project

Spring Semester 2017 – 2018

Authored By

Maryam Barifah 1420023

Nour Abdulaziz 1420149

Shrouq Al-Jaaidi 1420072

Balqees Mekhlafi 1420231

Submission Date

15/04/2018

Case Assignment
UNIVERSITY OF VIRGINIA HEALTH SYSTEM:

THE LONG-TERM ACUTE CARE HOSPITAL PROJECT

Pages 381-390

Idea of the case

This case puts students in the shoes of Larry Fitzgerald, the vice president for business development and finance at the University of Virginia Health System (UVa Health System). Students must decide, based on cash flow analysis and nonfinancial factors, whether or not to propose a long-term acute care hospital (LTAC) project to the board of directors of the U.Va. Health System. The LTAC is a very promising undertaking from the perspective of providing better care for patients, but the financial drivers of the project have yet to be assessed.

The primary objective in this case is to portray the major differences in project analysis for nonprofit organizations compared to for-profit companies and to highlight the unique issues relevant in a health care environment.

Questions

1. What are the nonfinancial drivers for adding an LTAC facility to the U.Va. Health System? What are potential reasons the board may not approve the project from a nonfinancial standpoint?

Hints: You can provide points from the case as to why the LTAC facility would be a good addition to the U.Va. Health System from the perspective of the hospital, the patient, and overall health care.

Students could suggest several reasons the board may not approve the project

2. What are the differences between nonprofit institutions and for-profit institutions? For example, how would a for-profit hospital approach the LTAC decision?

3. What is the average cost of capital of the for-profit hospitals provided in case Exhibit 3? Would this serve as a reasonable discount rate to analyze a set of for-profit LTAC facility cash flows? Should Fitzgerald use this number to discount the U.Va. LTAC facility’s cash flows?

Hints: Use a market risk premium (MRP) of 6% and the 10-year Treasury yield as the risk-free rate.

Use the data provided in Exhibit 4 page 390.

Determine the WACC in two cases: tax rate = 35% and tax rate = 0.

4. Using the information in the case and the memo from Karen Mulroney in case Exhibit 1, complete the cash flow projections in the spreadsheet provided. What do you get for the NPV and IRR of those cash flows?

5. What are the main drivers for NPV and IRR? Show the impact on NPV and IRR by changing a couple of these drivers to a “downside scenario” value.

Based on your financial analysis, should Fitzgerald propose the LTAC project in the board meeting.

Supporting Spreadsheet Data

The supporting Excel files are available for the convenience of students:

Q1. What are the nonfinancial drivers for adding an LTAC facility to the U.Va. Health System? What are potential reasons the board may not approve the project from a non-financial standpoint?

LTAC will benefit U.V.A in many areas such as; adding up to 25 beds per day for each transferred patient, boost money for patient care, work through matters that oppose many of the hospital systems, improve efficient patient turnover, addressing the bill insurance from both hospital stay and time spent in the LTAC. Moreover, it will be built within the U.Va On January 2007, the Centers of the Medicare and Medicaid services (CMS) halts the establishments of the facility. For them to build the facility they will need to have a loan of $15 million capital investment and the board want to acquire 5% profit margin.

Non-financial drivers for adding an LTAC:

-The LTAC hospitals are attractive financially as they increase revenues from patients who are taken care of by the system. Moreover, the hospital was paid insurance for patients staying regardless the time patients spent. This would allow the hospital to bill the insurance for both services of LTAC service and time spent in hospital. The addition of LTAC benefits the hospital in the reduction of expenses and capacity concerns.

- The hospital would be able to decrease the average expenses of a patient's stay up to 50% from $3000 to $1500.

- adding an LTAC will increase capacity of beds in the rate of 25 beds per day due to the process of transferring the patients to the LTAC thus providing space for new admissions n the main hospital.

-LTAC patients are taken of more conscious way due to their circumstances; therefore they receive higher care and morale compared to a regular hospital. This allows a faster recovery period and reduced infection rate. Each patient has his own room that made them more comfortable at their stay. They became proverbial with their caregivers due to their long stay. This built a sense of comfort friendly environment. The personalized care made patients recover faster.