REQUESTING CAPITAL AND EXECUTING BUSINESS PLANS

PRESENTED BYJANE C. KAYE, MBA

JANE KAYE HEALTHCARE CONSULTING LLCjanekaye@comcast.net

732-233-3144

REQUESTING CAPITAL AND EXECUTING BUSINESS PLANSAt the end of the session you should be familiar with:

Topics to consider before purchasing equipment

Gathering information for Finance

The basics of a business plan: Volume Revenue Supply Costs

Capital acquisitions and depreciation

Putting everything together into a Profit and Loss statement

WHY REQUEST CAPITAL

Existing equipment is Old No longer supported by manufacturer Outdated technology Inconsistent results Frequency of servicing

THINGS TO CONSIDER (just like real-life)

Supplies and other disposables (home printer)

Expected life/depreciation (wood vs plastic fence)

Servicing costs (new vs used car)

Construction/Fit-out (garage replacement)

Strategic Plan (where are we headed?)

MORE CONSIDERATIONS Patient safety: was

there a sentinel event

Patient satisfaction

Physician satisfaction or retention

Required by a regulatory agency

Offensive or defensive

Competition

Community perception/marketing

HOW TO READ A QUOTE

Price for capital equipment, discount, trade-in allowance

Outright purchase vs. lease (finance decision – similar considerations to buying a new or leased vehicle)

Price for instruments/accessories/disposables

Sales agreement – Terms & Conditions (T&C), warranty information

WHAT TO DO WITH QUOTE –QUESTIONS TO ASK VENDOR What exactly is included in the quote

How long is the quote good for? Typically 90 – 120 days

What other costs are not included in the quote

How much is annual service and maintenance

What supplies or other purchases are required to use the equipment

Is space fit-out needed

Upgrades for software

Don’t be afraid to negotiate

WHAT FINANCE NEEDS TO KNOW Why do you need it now. Capital committee review?

Price and where you are in negotiations

Plans for existing equipment (i.e. trade-in, sell, scrap)

Impact on volume

Construction needed to install

IT issues – new, and can be significant

Impact on disposables, supplies, staffing, turnaround time

DEFEND YOUR REQUEST: BUILD A BUSINESS PLAN Create a subgroup to evaluate the request

Planning: Is this a new or expanded service

Planning: What assumptions can be made about impact on volume, payer mix

Reimbursement: what is the current reimbursement and will it change

Finance: Gather all known costs for 1-5 years, or 1–3 years

EXAMPLE – Surgical Robot for Prostatectomy Surgeries

Two physicians have requested the purchase of a new robot (replacement) for minimally invasive prostatectomy surgeries.

They operate 2 full days per week with a current surgical volume of 3 cases per day (6 cases per week).

Cost for robot- $2,200,000

Supply cost - $2,000 per surgical procedure

QUESTIONS TO CONSIDER (these impact assumptions)

Is the volume new or existing? (Existing)

What is the likelihood of obtaining the volume? (Highly likely)

Does the volume have a ramp-up? (No)

Will other physicians use the Robot? (Yes)

Do the other physicians know how to use a Robot? (training time)

LET’S REVIEW SOME BASIC TERMS P&L = Profit and Loss Statement

RevenueMinus ExpensesProfit (Bottom Line)

• Conservative, Moderate and Aggressive scenarios Conservative = very likely to attain Moderate = likely to attain Aggressive = stretch/less likely to attain

Proforma = Method of calculating projected financial figures (Investopedia)

ASSUMPTIONS• The P&L is only as reliable as the assumptions used

• There is no single, definitive method for creating assumptions

• Look for reasonableness and focus on volume

• Each new business venture requires a unique approach

• Typical factors to consider New or existing service

Prior experience at your facility

Physician involvement/dynamics

LET THE NUMBERS SING

VOLUME: ITERATION #1

Always assume Conservative Moderate Aggressive

Days robot in service

Cases per day

Cases per

week

Cases per

month

Cases per year

a b a*b=c c*4=d d*12

Conservative 2 2 4 16 192

Moderate 2 3 6 24 288

Aggressive 2 4 8 32 384

Start with volume assumption

Volume drives revenue

VOLUME: ITERATION #2

Days robot in service

Cases per day

Cases per

week

Cases per

month

Cases per year

a b a*b=c c*4=d d*12

Conservative 2 2 4 16 192

Moderate 3 3 9 36 432

Aggressive 4 4 16 64 768

If we’re spending $2.2 million on a robot, shouldn’t it be in service more than 2 days per week?

VOLUME: ITERATION #3

Days robot in service

Cases per day

Cases per

week

Cases per

month

Cases per year

a b a*b=c c*4=d d*10

Conservative 2 2 4 16 160

Moderate 3 3 9 36 360

Aggressive 4 4 16 64 640

Plan for physician vacations - assume 10 months per year, not 12

VOLUME: Ramp-Up Example Always assume ramp-up for new volume

Look to prior experience and common sense to create ramp-up assumptions

Example of ramp-up over 12 months

Month 1 2 3 4 5 6 7 8 9 10 11 12

Conservative 2 2 2 4 4 6 6 8 10 12 14 16

Moderate 4 4 4 8 8 12 12 16 18 20 22 24

Aggressive 12 12 12 16 16 20 20 24 26 28 30 32

REVENUE PER CASE

Medicare is a good starting point

Never assume all amounts will be collected

Conservative assumption: reduce revenue to 95%

Estimated Medicare Payment Rate $7,800Percent collected 95%Collectible Revenue $7,410

Cases Per Year

Collectible Revenue per Case

Estimated Revenue per Year

Conservative 160 $7,410 $1,185,600

Moderate 360 $7,410 $2,667,600

Aggressive 640 $7,410 $4,742,400

PAYER MIX

The Medicare approach assumes Medicare payment is a reasonable average

With high Medicaid or self pay this approach will overstaterevenue

With managed care contracts or unusual (high) reimbursement rates this approach may understate revenue

Does the payer mix materially change the revenue?

The Reimbursement department should be able to give you rates for each payer

IMPACT OF PAYER MIX -Conservative

CONSERVATIVE: ($33,000) revenue reduction

PAYERREVENUE PER CASE

PAYER MIX

CASES PER YEAR

PROJECTED REVENUE

CONSERVATIVEMedicare $7,410 70% 112  $829,920Medicaid (80% of Medicare) $5,928 10% 16  $94,848Managed Care (120% of Medicare) $8,892 15% 24  $213,408Self Pay (25% of Medicare) $1,853 5% 8  $14,820TOTAL 160  $1,152,996Revenue Based on Medicare $1,185,600Reduction In Revenue Assumption ($32,604)

IMPACT OF PAYER MIX - Moderate

MODERATE: ($73,000) revenue reduction

PAYERREVENUE PER CASE

PAYER MIX

CASES PER YEAR

PROJECTED REVENUE

MODERATEMedicare $7,410 70% 252  $1,867,320Medicaid (80% of Medicare) $5,928 10% 36  $213,408Managed Care (120% of Medicare) $8,892 15% 54  $480,168Self Pay (25% of Medicare) $1,853 5% 18  $33,345TOTAL 360  $2,594,241Revenue Based on Medicare $2,667,600Reduction In Revenue Assumption ($73,359)

IMPACT OF PAYER MIX - Aggressive

AGGRESSIVE: ($130,000) revenue reduction

PAYERREVENUE PER CASE

PAYER MIX

CASES PER YEAR

PROJECTED REVENUE

AGGRESSIVEMedicare $7,410 70% 448  $3,319,680Medicaid (80% of Medicare) $5,928 10% 64  $379,392Managed Care (120% of Medicare) $8,892 15% 96  $853,632Self Pay (25% of Medicare) $1,853 5% 32  $59,280TOTAL 640  $4,611,984Revenue Based on Medicare $4,742,400Reduction In Revenue Assumption ($130,416)

WHAT ARE ALL THE COSTS?Use the same approach as the revenue estimate:

Reasonable estimate

Based on prior experience if known

Work with Materials Management Department

Supply costs are typically a percent of revenue or dollars per case

How material are the cost components

Assume supplies = $2,000 per case

SUPPLIES

Cases per Year

Supply Costs per

Case

Estimated Supply Costs

Estimated Revenue

Supplies as % of

Revenue

Conservative 160 $2,000 $320,000 $1,185,600 27%

Moderate 360 $2,000 $720,000 $2,667,600 27%

Aggressive 640 $2,000 $1,280,000 $2,742,400 27%

DEPRECIATION Investopedia: Depreciation

indicates how much of an asset’s value has been used up

Depreciation is a method of allocating the cost of an asset over its useful life

Useful life is how long the asset will be useful to the business, not how long the asset will actually last

SAMPLE DEPRECIATION CALCULATION

Depreciation = Cost divided by Useful Life

Depreciation is a non-cash expense

Half-Year Convention: Treats all property acquired during the year as being acquired exactly in the middle of the year

Purchase price $2,200,000 Life (years) 7 Yearly Depreciation $314,286 1/2 Year Convention 0.50 Year 1 Depreciation $157,143

PUT IT ALL TOGETHERProforma P&L with 3 volume assumptions using Medicare revenue

DA VINCI ROBOTPROFORMA PROFIT AND LOSS STATEMENT ‐ YEAR 1 ONLY

Using Medicare to Estimate Revenue

CONSERVATIVE MODERATE AGGRESSIVE

Revenue (Medicare) $1,185,600 $2,667,600 $4,742,400cases 160 360 640

Supplies ($2k per case) 320,000  720,000  1,280,000 Depreciation 157,143  157,143  157,143 Total Expenses 477,143  877,143  1,437,143 

Profit (Loss) $708,457  $1,790,457  $3,305,257 

PUT IT ALL TOGETHERProforma P&L with 3 volume assumptions using Payer Mix revenue and supplies as a % of revenue

DA VINCI ROBOTPROFORMA PROFIT AND LOSS STATEMENT ‐ YEAR 1 ONLY

Using Payer Mix to Estimate Revenueand Supplies as % of RevenueCONSERVATIVE MODERATE AGGRESSIVE

Revenue (Payer Mix) $1,152,996 $2,594,241 $4,611,984cases 160 360 640

Supplies (27% of Revenue) 311,309  700,445  1,245,236 Depreciation 157,143  157,143  157,143 Total Expenses 468,452  857,588  1,402,379 

Profit (Loss) $684,544  $1,736,653  $3,209,605 

5 YEAR PROJECTION – Accrual Basis Moderate volume

3% rate increase Years 2-3; 1% increase Years 4-5 (Reimbursement Department)

5% supplies increase Year-Over-Year (y-o-y). (Purchasing Department)

Year 1 Year 2 Year 3 Year 4 Year 5

Revenue $2,667,600  $2,747,628  $2,830,057  $2,858,357  $2,886,941 cases 360 360 360 360 360

Supplies $720,000  $756,000  $793,800  $833,490  $875,165 Depreciation $157,143  $314,286  $314,286  $314,286  $314,286 Total Expenses $877,143  $1,070,286  $1,108,086  $1,147,776  $1,189,450 Total Profit (Loss) $1,790,457  $1,677,342  $1,721,971  $1,710,582  $1,697,491 Cumulative Profit (Loss) $3,467,799  $3,399,313  $3,432,553  $3,408,072 

5 YEAR PROJECTION – Cash Basis Cash basis financials show cash outlays for capital

purchases instead of depreciation

Year 1 Year 2 Year 3 Year 4 Year 5

Revenue $2,667,600  $2,747,628  $2,830,057  $2,858,357  $2,886,941 cases 360 360 360 360 360

Supplies $720,000  $756,000  $793,800  $833,490  $875,165 Depreciation $157,143  $314,286  $314,286  $314,286  $314,286 Total Expenses $877,143  $1,070,286  $1,108,086  $1,147,776  $1,189,450 Total Profit (Loss) $1,790,457  $1,677,342  $1,721,971  $1,710,582  $1,697,491 Add Back Depreciation $157,143  $314,286  $314,286  $314,286  $314,286 Subtract Capital Cost $(2,200,000)Cash Basis Profit (Loss) $(252,400) $1,991,628  $2,036,257  $2,024,867  $2,011,776 Cumulative Profit (Loss) $1,739,228  $4,027,885  $4,061,124  $4,036,644 

OTHER COSTS

Staffing

Benefits

Education, training, travel

Office costs and other expenses

Utilities and other occupancy costs

Inpatient Stay (need cost accounting information)

Preadmission Testing

Ancillary services (i.e. lab work, radiology)

Fixed vs variable costs

Depending on the project, other costs can include:

TAKE AWAY Work collaboratively to create a business plan

Be prepared to answer – or investigate– questions related to volume, revenue and costs

Have fun, and remember …

LET THE NUMBERS SING

REQUESTING CAPITAL AND EXECUTING BUSINESS PLANS

PRESENTED BYJANE C. KAYE, MBA

JANE KAYE HEALTHCARE CONSULTING LLCjanekaye@comcast.net

732-233-3144