Feasibility Studies: The Key to Evaluating Expansion Opportunity by By Phillip Laux, MS

Primary TCTM™211,0122.76582

Secondary TCTM™76,0883.22245

* The primary TCTM utilization rates can differ from the secondary TCTM.

Utilization rates can be obtained through most state healthcare agencies or reports from third party data collection companies.

Following a thorough market assessment, a cardiovascular operational review provided senior management with a detailed summary of the current clinical area capability and what would be required for expansion. The operational analysis reviewed existing equipment, ancillary services capacity, staffing, and workflow processes. In addition, all future cardiac expansion needs were identified in a facility plan designed to provide a clinically and technically advanced program. The “state of the art” design, One Stop Post Op™ was chosen by this facility to provide a new approach to post surgery care and a distinct competitive advantage. The One Stop Post Op model allows the cardiovascular patient to remain in the same room from admission to discharge. The nursing care level adapts to accommodate changing patient needs.

The next step was to develop an accurate financial assessment of the proposed expansion. The financial assessment was developed with historical information sources and assumptions for sensitivity and impact modeling. The finance department provided information on payor mix, reimbursement, salary, supply and indirect expense, capital investment, and projected facility expansion costs. Due to vulnerability of the health care environment, senior management challenged the financial model to test the impact of various cardiac expansion scenarios. Return on investment of each scenario was analyzed and evaluated to determine the profitability and margins. The demand projections were the basis for the financial model to produce a financial summary and the following financial statements: Revenue & Expense, Cash Flow, Balance Sheet, and Revenue. The financial summary provided senior management with a five year pro forma projecting average return on investment and payback period for the cardiac expansion project. In this instance, the five year average ROI was 20.4% and projected payback period at 5.61 years.

The Cardiovascular Expansion Feasibility Study provided senior management with a concise overview of the needs of the patients and community that the hospital served. Feedback and guidance from the medical staff was solicited and considered before a decision to proceed was made as physician support and acceptance is vital to program success. A through due diligence to accurately estimate the level of resources, both operational and capital was essential to the process and permitted the organization to carefully evaluate the financial viability of expanding services. In essence, the study enabled the key stakeholders to strategically decide on a course of action that could have a significant short-term effect and impact the organization’s long-range future position as an acute care provider.

The community based hospital in this case study approved the cardiovascular expansion project and used the feasibility study in multiple ways. They were able to document need and identify an underserved population as support for state application for a CON, the feasibility study provided the documentation necessary to secure financing and provided a “road map” for implementation of the project. The report was used as a guide often during the preplanning and start-up phase and after the implementation of interventional cardiology and open heart surgery as a benchmark for review against actual program performance.

Conclusion

Hospitals experiencing increasing levels of financial and market risk are turning to feasibility studies to determine if they should offer new or expanded services. This case study analysis is an overview and discusses thoroughness of the entire feasibility process. The process proved to be essential to this hospital’s strategic financial planning. Organizations, making substantial investments to expand into unfamiliar territory cannot make sound business decisions without the proper tools. The cost of a feasibility study is a relatively small expenditure in light of the overall project cost, but hospitals are finding it to be essential and vital to expansion success.

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BIO:

Phillip Laux, MS is the finance manager with Health Care Visions, Ltd a leading cardiac consulting firm. He earned his Master of Science in Management and Technology from Carlow University in 2000 and Bachelor of Arts in Administration from the University of Pittsburgh in 1994. Phillip has over 8 years of financial reporting, statistical analysis, revenue modeling for hospitals and physicians.

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