Question

You are a consultant with 10 years experience in the health care insurance industry. A group of 20 doctors is considering forming a new medical group. The group has asked you to prepare a report on whether it should build a facility within 30 miles of the downtown center of a city with a population of 500,000 for $100 million dollars. Prepare a report for the management team of the doctor’s group on your proposed $100 million expenditure plan. In your report, reflect on the key course objectives as well as the financial, legal, and alternative health care models.

Answer 1

When healthcare providers make the decision to go into go into business for themselves or with a group of providers there are several aspects that must be considered tin order to determine if the venture will be able to sustain its self as well as be profitable for the providers involved. Luckily, with my ten years of experience I will be able to create a report that will demonstrate who will be a direct stake holder on the $100 million project for the new facility with a detailed strategy on spending and revenue, compliance, alternative low cast healthcare. This will be shown with data of the development as well as through assets planning.

When creating a new company there are many aspects to be considered but none more prevalent that the legal structure of the organization. This aspect will involve selecting the type of organizational tax obligations the organization will be liable for, collection of capital for the venture, budget, facility locations, procurement of office and medical equipment, deciding on proper EMR (electronic medical record) software, securing investors and or financing, personnel (hiring/training/management), and advertising for the practice.

Another area that my experience will aid the medical group in is credentialing. I will be able to help ensure that the organization has a very diverse group of payors so that they will be able to cover the organizations operating cost. Many physicians are not aware that the correct balance of payor reimbursement rates can be detrimental to an organization bottom line. Also, I will be able to aid the organization’s providers in credentialing with area hospitals to ensure that they have privileges. This will allow for other avenues of revenue for the organization. Many times when providers treat patients in the hospital in an urgent, emergency, or surgical setting the patients tend to acquire follow-up care with the provider outside of the hospital setting.

During this process committees will have to be created to complete research in all areas mentioned above. The proper amount of time must be allotted for research and the decision making process, ideally six months to a year would allow for proper analyzing and investor researching. All legal documentation should be carefully looked over by legal representation that the organization has collectively decided on. This will help to ensure that all parties in the new medical group feel equally protected as opposed to using legal counsel that is currently employed by one individual. These documents can include ownership, organizational by-laws, any type of purchase and sells agreements, employment contracts, employee plans.

Another very important aspect of the new medical group that needs to determine during this phase of planning is a projected opening date. This will help to keep the group on task with deadlines for all committees; also to budget for advertising and opening expenses in real time.

Organization Type

It is my recommendation that the organization choose to be established as a For-Profit group in order to raise the amount of capital needed from outside investors to build the new facility. Research shows the increased corporate influence in health care is especially evident in the growing prevalence of for-profit companies within the HMO sector. Between 1981 and 1997, for-profit HMOs grew from representing 12% to 62% of total HMO enrollees and from 18% to 75% of plans. Among hospitals, on the other hand, for-profit companies have increased their role, but nonprofit organizations continue to dominate the industry. Between 1981 and 1995, for-profit companies grew from representing 9% to 12% of community hospital beds and from 13% to 14% of community hospitals. The market capitalization, or total stock value, of the relatively young HMO industry grew from a little over $3 billion in 1987 to almost $39 billion in 1997 – an almost twelve-fold increase – while the stock market as a whole grew about four-fold to a total of $10.5 trillion .

By the organization choosing to be a For-profit, the purpose of these organizations is to earn a profit that can be distributed to investors and or the profits may be re-invested into the organization . For-profit HCO must also find the balance between there financial responsibilities and their mission to provide quality healthcare services to their community. The types of businesses are also publically traded for profits, demonstrating a faster return on investments rather than a non-profit organization that has limited avenues of capital. As a For-profit organization in the healthcare market today, the organization will have a better chance of mixed payors rather than being a Non-Profit group with a majority of lower reimbursement rates and higher unpaid patient portions .

Strategic Planning

A strategic plan should provide some information about projected service levels, which in turn should drive expected investment . Healthcare firms can no longer decide which services they want to deliver without assessing the economics of demand. This requirement appears consistent with the concept of strategic planning as it is used in general industry . An impartial committee must be developed that will deliver data, advice, and decisions to the investment group that will be in the interest of the collective group rather than individuals. Data must be complied regarding the organizations assets, healthcare needs of the community, services provided already in the community as well as the current work force availability and skill set.

Financial Planning

This portion of the planning process is the most critical area; if all aspects are not covered that are involved in this part of the organizational research and planning the high the probability of failure. Financial planning is fashioned by the definition of programs and services and then assesses the financial feasibility of those programs and services. In many cases a desired set of programs and services may not be financially feasible.

The newly formed group of providers will need to create a model of the forecasted budget needed to provide the desired services. The forecast will need to include estimated payor reimbursement verses daily operation cost not limited too but including patient services, testing, supplies, facility fees (rent/mortgage, maintenance, upkeep of the grounds) as well as salaries and benefits for staff. The financial planning must cover expenses that will be encured over the next twelve to twenty-four months, also cover any expenses incurred prior to the opening of the practice.

Operating margin costs should include all services that will be routinely provided leaving space for occasional extensive services too. Also the surrounding medical organizations should be taken into consideration for a comparison of the projected cost. The outside groups are already providing services to the patient population that the new group wants to tap into the revenue cycle. The operating margin can be calculated with the ratio, it will also help to determine the necessary patient load on a daily, weekly, monthly, and yearly basis:

            Operating Margin=_____Operating Income______

                                                Revenue (reimbursements)

Management of the new healthcare group will require the skills of a seasoned administrator or physician with an understanding of the financial aspect of business operations. All shareholders should participate at this level equally having assigned duties in specific areas. These areas can range from finance manager, human resources, building maintenance, provider relations (with vendors & payors), public relations, and patient relations. Group meetings should be scheduled regularly to help keep all stakeholders informed of the direction that group is moving at all times, this way should issues arise all parties are involved and aware of the situations. A medical management consultant should be hired if none of the stakeholder poses any experience with management. The consultant can help format reports, on performance, operations, productivity, as well as revenue. These types of meetings should be scheduled semi-annually or quarterly to allow for adjustments if needed throughout the year. The also allow for opportunities for stakeholder to have questions answered regarding areas that are not their direct responsibility.

Developing Ethics, Mission, and Vision

Prior to the opening of the facility the doctors will need to come together and determine what the ethics of the group will be and how they will demonstrate to the public. As well as deciding on a mission and vision statement that can inform the people outside of the organization what they should expect when dealing with the new medical group. In a group this large many different individuals are working together to create a team of quality healthcare providers that aim to deliver top quality care. Sometimes people have a very different sense of right and wrong, but as an organization all partners must be aware of what is to be expected as an associate of the group.

Organizations need ethics and morals to help create the culture of the organization, which will attract the desired type of employees, staff, and providers. If organizations have an established culture people will be more incline to stay with the organization for longer periods of time causing a lower turnover rate. By establishing these rules staff members will be advised of consequences for violating the organizations policies as well as conduct that do not align with organizational ethics.

Consultant Recommendations

In my opinion as the consultant for the new healthcare group with the proposed new facility at $100 million plan; the surrounding community that will be served has a population of 500,000 with a lacking demand for healthcare due to the city only having one major hospital and a few private practice would be a sound investment. With the practice budget at $5,000,000 per year including all salaries and facility cost. The new facility would have 20 doctors and 10 other staff members (including medical assistance, technicians, and one registered nurse). The total salary and wages expenses are expected to be $2,500,000 per year. The repair and maintenance expense is expected to be $500,000, cost of supplies is expected to be $1,500,000 and advertising and other costs are expected to be $500,000 per year. The total expenditure would be $5,000,000 and the expected revenue is $21,000,000. The facility will generate $16,000,000 of net income in every year. The new facility is predictable to must valuable lifetime of 20 years and the cost of capital is forecasted to 10%. With these types of profit margins the organization can afford to payout its investors or re-invest into the organization annually for upgrades and expansion.