Question

Established in 1987, ABC Community Hospital not-for-profit is an acute care hospital located in an east coast Metropolitan area. With a staff of nearly 200 physicians and specialists, 800 employees and 100 volunteers, they offer a full range of healthcare services. They are accredited by the Joint Commission on Accreditation of Healthcare Organizations. The hospital has been profitable for the last 5 years with a profit margin of 3-4%. The mission of ABC Community Hospital is to provide accessible and comprehensive healthcare services in a convenient and cost-effective manner to the people who live in our community.

At the last Board meeting, hospital administration and the Board of Directors began to discuss a proposal to build a new wing devoted to a Cancer Center and ancillary services devoted to the treatment of cancer. The new wing would have 30 acute care beds, four surgical operating rooms, intensive care unit and extensive support services, including physical therapy and hospice care. All patient rooms would be private. There is no Cancer Centers within a 200 mile radius of the hospital service area.

Now, the Board of Directors has come back with more questions that they want you to add to the original plan with 2-3 pages of new content:

• Compare and contrast the kinds of decisions that are made in the Cancer Center capital investment decision analysis for ABC Community Hospital.
• What information is needed by the CFO to evaluate the Cancer Center capital investment project? Use the classification of capital expenditures and justification of capital expenditures for this project, and include working capital management.  
• Who, internally from the healthcare system and externally, should be involved in the capital investment decision process to determine the feasibility of the Cancer Center?

Answer 1

ABC Community Hospital is an acute care hospital. Expansion of the hospital to include a cancer care wing would primarily require the following major capital expenditures:

1. Land & Building - Owing to the plans to develop 30 private rooms along with operating rooms and extensive services, the hospital will need to develop a complete wing of a building or develop a new building itself for cancer care.

2. Equipment - Owing to the nature of the disease, cancer has requirements for a large amount of machines and equipment for the treatment of patients. Such machines are expensive and often imported from abroad.

The spread of cancer has been widespread and now more than 50% of households have a close or distant relative suffering from one of the various kinds of cancer detected until now. Considering that there are no other hospitals in the 200 mile radius of the hospital, it could be well assumed that the patients from the area are moving to other locations for their treatment.

The company has been regularly earning profits and we assume that there have been no dividends paid which means that there should be a decent sum accumulated with the organisation to use for expansion. Since it is an old organisation and has strong financials, it would not be difficult to procure debt for the remainder of the cash required.

Externally, there should be a Financial Analyst who can analyse the risks and returns of the organisation and can price the various features accordingly. Internally there should definitely be the directors of the company as well as some experienced employee of the company who is well versed with the organisation, its policies, beliefs and values and the mentality of the workforce so as to give the best target points to the company which can be used effectively for best results.