Learning from a Hospital Cash Flow Management Case Model

Posted on March 18, 2011 by Dr. David Edward Marcinko MBA MEd CMP™

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The Mackenzie Hospital Clinic

[By Staff Reporters]


The Mackenzie Hospital Clinic was offered a private fixed-rate MCO contract that would increase revenues by $50,000 for the next fiscal year. The clinic’s 30% gross margin would not change because of the new business.

However, $10,000 would be added to overhead expenses for another part-time assistant. More importantly, the AR collection time would be lengthened to one year, or paid at the end of the contract period.

The cost of services provided for the contract represents the amount of money needed to service the patients produced by the contract. Since gross margin is 30% of revenues, the cost of services is 70% or $35,000.

The financial manager had to decide whether there would be enough internally generated cash flow to accept the contract.

The Financial Facts

The manager knew that adding the extra overhead would result in $45,000 of new spending money (cash flow) needed to care for the patients. He had to further refine his calculations by dividing the $45,000 total by the number of days the contract extends (i.e., 365 days) to determine that the new contract would cost about $123.29 per day of cash flow. Now, the financial manger had to ask: where would the money come from?

He was reluctant to turn away any business for the clinic, so decided he must develop other methods to generate the additional cash. He made the following suggestions:

  • extend AP timelines and reduce AR times; and/or
  • borrow with short-term bridge loans or a line of credit; and/or
  • discuss the situation with vendors for longer or more favorable terms; and
  • do not stop paying corporate taxes.

Key Issues:

1) Consider what changes the Mackenzie Hospital Clinic might implement to ensure that it regularly makes good cash management, budgeting, and risk projection decisions?

2) If the Mackenzie Hospital Clinic is successful and attracts more long-term managed care fixed contracts, the serious nature of the cash flow problem becomes apparent. For instance, adding another nine contracts would multiply the above example tenfold. In other words, the clinic would increase revenues to $1 million with the same 70% cost of services and $100,000 increases in operating overhead expenses.

3) How much free cash flow would be required?

[Using identical mathematical calculations, we determine that $450,000/365 days equals $1,232.88 per day of needed new cash flow.]

4) What happens if the contract only pays off at the end of the year?

Assessment

Any other thoughts?

Conclusion

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2 Responses

  1. Ann Miller RN MHA, on March 18, 2011 at 2:05 AM said:

    Case Models

    For more case models, medical office checklists and related healthcare management HIT and eMR CD-ROM titles, please visit:

    1. https://medicalexecutivepost.com/?p=24878&preview=true
    2. https://medicalexecutivepost.com/2010/03/12/healthcare-case-models-cd-rom
    3. https://medicalexecutivepost.com/office-checklists-on-cd-rom/

    Ann Miller RN MHA
    [Executive-Director]

    Like

  2. Tim, on April 22, 2011 at 12:34 PM said:

    Medicare Slashes Hospital Reimbursement

    CMS has released a proposed rule that would cut Medicare payments to hospitals by nearly $500 million in 2012. This cut is in addition to the $155 billion in reduced payments hospitals will see over the next decade as a result of the Affordable Care Act (ACA).

    In 2011, payments to hospitals were cut $142 million. Under the proposed Inpatient Prospective Payment System (IPPS) rule, the nation’s 3,400 acute care hospitals would receive an 0.5% reduction in reimbursement rates for inpatient stays in fiscal 2012, according to CMS. The new payment rule is effective for hospital discharges on or after Oct. 1st, 2011.

    http://www.medpagetoday.com/PublicHealthPolicy/Medicare/26043

    Talk about cash-flow!

    Tim

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