Analyze and address challenges in strategic planning for healthcare organizations through the use of financial information. Create a business plan for a new service line in a healthcare organization.

Learning Objectives Analyze and address challenges in strategic planning for healthcare organizations through the use of financial information. Create a business plan for a new service line in a healthcare organization. Assess the appropriate organizational structure for a new business initiative, including corporate structure and scope of leadership. Understand the management of costs, quality, and access. Demonstrate the ability to make financial decisions and develop a strategy for change. Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale. 2 Key Terms and Concepts • Cost of capital • Financial planning • Healthcare business plan • Horizontal integration • Income statement • Internal rate of return (IRR) • Net present value (NPV) • Payback period • Pro forma financial statements • Regression analysis • Vertical integration Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale. 3 Introduction The healthcare business plan serves an important role in successfully aligning hospitals and physicians through financial integration and by incorporating joint incentives for profitability, quality, and clinical productivity. Effective business planning is a formal, measurable process that evaluates resource allocation, performance, and the current business environment and forecasts potential demand for new services. Completion of a comprehensive business plan will evaluate new business initiatives and ensure the initiatives meet a demonstrated community need and are the most appropriate use of the organization’s scarce resources. Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale. 4 Healthcare Business Plan A method by which a healthcare organization evaluates future investment in a new business initiative. To create a comprehensive business plan, the organization must gather a wide range of information and forecast future demand. An organization’s healthcare business plan should be consistent with its overall mission and vision and should consider the competitive market. The typical business plan includes a detailed discussion of the proposed healthcare service, the identification of target markets, and financial projections. Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale. 5 Exhibit 7.1 Sample Business Plan Outline Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale. 6 Business Purpose The statement of purpose should define the company’s core goals and purpose and form the basis for the company brand and promises to consumers. Horizontal integration: Expanding current lines of business into new geographic areas. Vertical integration: Adding new business initiatives, such as outpatient clinics, ambulatory surgery centers, or skilled nursing facilities, or acquiring and integrating physician group practices. Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale. Environmental Analysis External economic factors to consider: Current economy Regulatory factors Analysis of the competitors Healthcare legislation Reimbursement for care CMS programs on healthcare compliance Evidence-based clinical care Mergers, acquisitions, or joint ventures to reduce costs, share risks, and enhance reputations Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale. 8 Cost of Capital Cost of capital is the opportunity cost of making a specific investment. It is the rate of return an organization must achieve to persuade decision makers to make a capital investment, such as building a new facility, worthwhile. It reflects what could have been earned by putting the same money into a different investment with equal risk. See Highlight 7.1 for an example of the cost of capital. $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale. 9 Regulatory Factors Stark laws regulate hospital partnerships with physicians. The intent of this federal legislation was to reduce conflicts of interest regarding physician referrals and to limit overutilization of healthcare services. See Highlight 7.2 for more information. Violations of the Stark statutes are punishable by a $15,000 civil penalty Certificate-of-need regulations They require health services planners to obtain approval from state officials to build a new healthcare facility. The intent of these regulations is to limit the duplication of services in a geographic area. Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale. Human Resources Inclusion of clinicians on teams working to develop business plans is important (e.g., physicians, nurses, and other allied health professionals). One important human relations trend is employment of physicians by hospitals. In 2000, 53 percent of physicians were independent from their hospitals. In 2012, that number dropped to 23 percent. Increased accountable care organizations (ACOs), group practices, and affiliations require different skill sets. Organizations that exhibit an organizational culture of trust, respect, and employee recognition have the lowest turnover rates. Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale. 11 Physical Plant According to Wong-Hammond and Damon (2013), many health systems are deferring routine maintenance and other capital expenditures on aging facilities. Unfortunately, these capital expenditures cannot be delayed indefinitely. Health systems should develop a capital allocation plan that aligns funding sources with mission-driven growth initiatives. Many health systems face operating environments of declining demand for inpatient services, limited growth in inpatient revenue, and increases in ambulatory care provided in outpatient settings. Communities’ evolving healthcare needs require investments in new facilities. Successful organizations develop a facility master plan that incorporates high-performance work processes and the latest technology. Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale. 12 Marketing Plan A strong marketing plan is important to ensuring the success of new business initiatives. As a result, the development of a formal marketing plan is an important part of the process of developing a business plan. See Chapter 5 for more information. Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale. Financial Plan Financial plan: Document that analyzes financial information to demonstrate potential performance of a new business initiative. Capital funding is most often needed to obtain buildings, land, and equipment over a certain dollar amount. Other expenses can come from operating revenue. A capital acquisition strategy is key to any healthcare business plan and should consider the following: How to access external debt such as bank loans or bond financing (Additionally, for-profit hospitals have the ability to use equity capital, which is the sale of common stock.) The use of business plans to set targets, create objectives, and reprioritize Multiple finance options, such as lease strategies versus buy strategies Level of risk associated with the initiative in order to calculate the needed financial returns Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale. 14 Financial Terms Pro forma financial statement: Statement prepared before a business initiative is undertaken to model the anticipated financial results of the initiative. Income statement: A summary of an organization’s revenue and expenses over a certain period. Payback period: Length of time it takes a new business initiative to recoup the cost of the original investment. Net present value (NPV): Figure calculated on the basis of discounted cash flow to evaluate the financial worth of a business initiative; the amount of money a business initiative is projected to earn minus the amount of money originally invested in it. Discounted cash flow: Figure used to determine the value of an amount of money over time. Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale. 15 Exhibit 7.3 Physical Therapy Clinic Annual Income Statement Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale. Exhibit 7.4 Projected PT Clinic Payback Period Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale. Exhibit 7.5 Projected PT Clinic Payback Period Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale. Internal Rate of Return Internal rate of return (IRR) is a term used in capital budgeting to measure and compare the profitability of investments. It is the interest rate at which the net present value (NPV) of all the cash flows (both positive and negative) from a project or investment equal zero. In the same way that payback period may be used to prioritize projects (as discussed earlier in the chapter), an organization could choose the project with the highest IRR from a list of potential projects, thereby maximizing overall profitability. Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale. 19 Planning Tools Business Planning Software A variety of software is available to assist business plan development. Business planning software helps the business leader define the proposed product or service, identify the specific market or markets for that product or service, conduct market research, analyze the competition, determine the market position of competitors’ products and services, and describe the clinical care process. Financial Analysis Tools Microsoft offers a suite of financial planning tools in Excel that can be used for healthcare business planning. These tools, which can be accessed by clicking on “fx Insert Function” under the “Formulas” tab, can calculate IRR, payback period, NPV, and other values. Additional information on these capabilities can be found at Matt H. Evans’s website: www.exinfm.com/excel%20files/npv_irr.xls. Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale. 20 Planning Tools Forecasting Tools Developing accurate workload projections is another important part of healthcare business planning. Future demand for a new service can be estimated by looking at patient demographics in the market area. Age, sex, cultural diversity, per capita income, unemployment rate, and payer mix are all factors to consider in assessing the potential profit of a new business initiative. Regression analysis Mathematical method of determining the relationships between variables, usually the effect of one variable on another, such as the effect of a price increase on demand. See Highlight 7.4 for more information. This method provides an accurate estimate of future workload and can be adjusted to reflect seasonal fluctuations in the demand for health services. Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale. 21 Summary Quality and efficiency are becoming increasingly important to the success of hospitals in the new, value-based environment of healthcare reimbursement. Physicians must increasingly become accountable for cost-effective care. Opportunities also exist to take advantage of payment incentives through CMS for hospitals and physicians as they participate in ACO models and other approaches to bundle healthcare reimbursement. By controlling costs, health systems have an opportunity to manage to Medicare reimbursement for treatments and procedures, which in the aggregate will allow them to become low-cost providers and succeed in the healthcare market of the future (Levin and Gustave 2013). Copyright 2016 Foundation of the American College of Healthcare Executives. Not for sale. 22 Summary Effective business planning enables integrated healthcare systems to allocate healthcare personnel, facilities, and information technology efficiently. To maintain a competitive position in the market, healthcare organizations must pursue new business initiatives. Successful business planning and accurate forecasts for these new initiatives depend on the collection and analysis of historical data, input from clinical providers, patient demographic data, physician referral patterns, and competitors’ market share. The use of forecasting tools such as regression analysis increases the accuracy of forecasts by accounting for seasonal fluctuations in the demand for health services, short-term variations, and long-term industry trends. Use of pie charts, graphs, and other visuals will further aid in selling the plan. The business plan is one of the major components of strategic planning overall.

Analyze and address challenges in strategic planning for healthcare organizations through the use of financial information.  Create a business plan for a new service line in a healthcare organization.

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