Coral Bay Hospital: Evaluating Outpatient Surgery Expansion

Coral Bay Hospital is a 250-bed, investor-owned hospital located in Coral Bay, Florida, which is kno was founded in 1946 by Dr. Rob Winslow, a prominent Florida physician, on his return from service 1967 while it was still small and in a relatively quiet setting. However, in recent years, South Florida fostered high economic growth and the need for more healthcare services. Today, under a succession leading healthcare providers in the area. Coral Bay’s management is currently evaluating a proposed on ambulatory surgery, see the Ambulatory Surgery Center Association website at www.ascassociatio performed by specialists in gastroenterology, gynecology, ophthalmology, otolaryngology, orthopedi requires an average of about one and a half hours to complete; minor procedures take about one hour hours. About 60 percent of the procedures are performed under general anesthesia, 30 percent under anesthesia. In general, operating rooms are built in pairs so that a patient can be prepped in one room room. The outpatient surgery market has experienced significant growth since the first ASC opened i more than 25 million. This growth has been fueled primarily by three factors. First, rapid advanceme historically performed in inpatient surgical suites to be offered in outpatient settings. This shift was c endoscopic, and arthroscopic technologies. Second, Medicare has been aggressive in approving new Medicare patients using outpatient surgery services has grown substantially. Third, patients prefer ou third-party payers prefer them because they are less costly. Because of these factors, the number of in past 20 years, whereas the number of outpatient procedures has continuously grown more than 10 pe surgeries has been accompanied by a corresponding growth in the number of outpatient facilities nat competition in many areas has become intense. Somewhat surprisingly, no ASC exists in Coral Bay’ immediate service area. Coral Bay currently owns a parcel of land adjacent to its facility that is a per five years ago for $300,000, and this amount is reported as an asset on the balance sheet. Last year, $ utility lines, and this amount was reported as an operating expense on the hospital’s income statemen value of the land on the balance sheet). If sold in today’s market, the land would bring in $400,000, n been extremely volatile, so Coral Bay’s standard procedure is to assume a salvage value equal to the depreciated for either book or tax purposes. The ASC building, which would house four operating su an additional $5 million, for a total of $20 million. Assume that both the building and the equipment system) five-year class for tax depreciation purposes. (In reality, the building would have to be depre

the equipment.) The project will probably have a long life, but Coral Bay typically assumes a five-ye approximates the value of the being performed at stand-alone ASCs, and by 2021, the number had grown to more than 25 million. First, rapid advancements in technology have enabled many procedures that were historically perform settings. This shift was caused mainly by advances in laser, laparoscopic, endoscopic, and arthroscop approving new minimally invasive surgery techniques, so the number of Medicare patients using out patients prefer outpatient surgeries because they are more convenient, and third-party payers prefer t the number of inpatient surgeries has remained more or less flat over the past 20 years, whereas the n more than 10 percent annually. Rapid growth in the number of outpatient surgeries has been accomp outpatient facilities nationwide. The number currently stands at about 5,300, so competition in many exists in Coral Bay's immediate service area. Coral Bay currently owns a parcel of land adjacent to it The hospital bought the land five years ago for $300,000, and this amount is reported as an asset on land and put in sewer and utility lines, and this amount was reported as an operating expense on the h thus not included in the asset value of the land on the balance sheet). If sold in today’s market, the la and taxes. Land prices have been extremely volatile, so Coral Bay’s standard procedure is to assume course, land is not depreciated for either book or tax purposes. The ASC building, which would hous equipment would cost an additional $5 million, for a total of $20 million. Assume that both the build accelerated cost recovery system) five-year class for tax depreciation purposes. (In reality, the buildi than the equipment.) The project will probably have a long life, but Coral Bay typically assumes a fi approximates the value of the cash flows beyond Year 5 by including a terminal, or salvage, value in typically uses the market value of the building and equipment after five years, which for this project land value. (Note that taxes must be paid on the difference between an asset’s salvage value and its ta cost $10,000 has been depreciated down to $5,000 and then sold for $7,000, the firm owes taxes on t

The expected volume at the ASC is 20 procedures a day. The average charge per procedure is expect plan discounts, and other allowances lower the net patient revenue amount to $2,000. The ASC woul 250 days a year. Labor costs to run the ASC are estimated at $3,200,000 per year, including fringe be would add another $100,000 in annual costs. If the ASC were built, the hospital’s cash overhead cost housekeeping and buildings and grounds maintenance. In addition, the ASC would be allocated $50, overhead costs. On average, each procedure would require $400 in expendable medical supplies, inc receivables would increase slightly if the center is constructed, its accruals and payables would also expected to be small and hence not material to the analysis. Coral Bay’s marginal federal-plusstate tax rate is 30 percent. W staff meeting, several questions were raised. Coral Bay’s chief of medicine expressed concern over t surgeries. This concern prompted an analysis by the head of the surgery department, who reported th cash revenues annually. When pressed, the department head estimated that such a reduction in volum reduction in annual cash expenses. The CEO has asked DeShawn Williams, Coral Bay’s director of c DeShawn was invited to the last board of directors’ meeting, where several concerns about the propo was the impact of potential inflation on project profitability. Both input costs and charges in the heal overall inflation. Furthermore, inflationary pressures have been highly variable. For the proposed AS for costs (except depreciation) and 2 percent for net patient revenue. In previous capital budgeting de inflation on project profitability with a table such as the one shown in exhibit 21.1. The second conce impact on profitability if actual outcomes differ from the expected ones. Recently, the board was forc when analyzed two years ago but turned out to be a big money loser. The board does not want a repe thought Coral Bay was putting too much faith in the numbers. “After all,” she pointed out, “that is w start worrying more about how projects fit into our strategic vision and how they affect the services w sensitivity, scenario, and break-even analyses are an integral component of the risk analysis that DeS risk analysis were obtained from the department heads of surgery, marketing, and facilities. Three in

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