DRAFT: This module has unpublished changes.

Executive Summary for the Wyandotte Ambulatory Surgery Center Proposal for Capital Expenditure Review Committee of

Kansas City Medical Center

 

Hannah Hohendorf

 

Assignment Date: March 16, 2017

 

This proposal is for investment in the Wyandotte Ambulatory Surgery Center (ASC) by the Kansas City Medical Center (KCMC). It is the opinion of this reviewer that it is a sound investment with opportunity for expansion beyond the pro forma scope of 2015-2018. The ASC will allow surgeons in orthopedics, otorhinolaryngology, and ophthalmology to optimize scheduling of outpatient surgeries which will increase the volume of patients that can be treated. With increased case volume and improved scheduling, staff member productivity may also increase (Herman, 2014). Below are summary figures from the attached pro forma with supplementary details regarding the projections.

 

The ASC site would be located one block away from Kansas City Medical Center utilizing a plot of land currently owned by KCMC awaiting development. The total estimated capital requirements for building the ASC are $10,391,903. This cost, as seen in the Capital Requirements and Depreciation tab, would include construction of a building with a 40-year useful life, facility interior build, operating room and recovery room equipment, waiting room furniture and office equipment, and startup cash costs including 1 month of supplies and salaries/benefits. As seen in the Loan and Interest tab, the best financing option for KCMC would be to take out a loan for 50% of the capital requirement, or $5,700,000. With KCMC’s high credit rating and a low principle, the lowest amount of interest would be paid from that form of financing.

 

The ASC would require 13.83 full-time employees (FTE) in 2016 which would include operating room nurses, operating room nursing assistants, recovery room nurses, administrative staff and a manager. A 12% increase in FTEs to 15.75 for 2017 and 2018 was projected to accommodate increased patient volume. Total personnel expense, with 15% benefits, was projected to start at $721,160 and increase 7% by 2018 due to the increased FTEs and 3% annual salary merit increases. Also, allocated overhead salaries and expenses would start at a fixed $250,000 with annual 3% merit increases.

 

Other expenses include facility and equipment expenses which would be fixed at $300,000 (using straight line depreciation), allocated overhead expenses which would be $40,000 a year fixed, and general and administrative expenses which would start at $200,000 fixed. All three of these fixed expenses would increase by 3% annually due to inflation. Drugs and supply expenses would also increase 22% by 2018 due to increased volume and inflation.

 

It was estimated that the ASC would have a 10% increase in patient volume each year from 2016-2018 due to a joint marketing campaign with KCMC and improved physician satisfaction. These patient volume projections suggest that the ASC should be outfitted with 3 operating rooms and 3 recovery room beds to accommodate growth through 2018.

 

As seen in the Statement of Operations, it was projected that the total operating revenues would increase 23% by 2018. This increase would largely be due to an increase in the gross patient services revenue from increased case volumes, but a decrease of 6% in charity care (due to expanded insurance coverage from the Affordable Care Act) would also contribute. Some countering pressure would be seen in a 15% increase in contractual adjustments for inflation and a 17% increase in bad debt adjustments due to increased patient volume by 2018.

 

Reimbursement for outpatient surgeries is lower than for surgeries that are performed in the hospital because there are decreased overhead costs for maintaining inpatient rooms and staff. However, as seen in the Statement of Operations, it was projected that with higher patient volumes, the ASC would have a 17% increase in profitability by the end of 2018. Also, by investing in an ASC with room to expand, other specialties like gastroenterology may be able to transfer services to the site. Furthermore, as more patients are insured, insurers will be looking for reduced costs in providing services that are appropriate in an outpatient setting (Herman, 2014), and KCMC will be well situated to accommodate their patients.

 

In closing, this reviewer recommends that the Kansas City Medical Center invest in building and opening the Wyandotte Ambulatory Surgery Center due to its anticipated profitability over the first 3 years of operation and the opportunity for growth in more specialties. If the market becomes saturated with ASCs, the association of the Wyandotte Ambulatory Surgery Center with KCMC will help keep business through referrals and joint marketing. Overall, this is a venture with high prospects.

 

References

 

Herman, Bob (2014). 4 Benefits of Hospital ASC Joint Ventures. Becker’s Hospital Review. Retrieved from http://www.beckershospitalreview.com/hospital-physician-relationships/4-benefits-of-hospital-asc-joint-ventures.html.

 

Hohendorf_Hannah_Unit 10 Course Project Deliverable Executive Summary.pdf

 

DRAFT: This module has unpublished changes.