Question: Grizzly Community Hospital in central Wyoming provides health care services

Grizzly Community Hospital in central Wyoming provides health care services to families living within a 200-mile radius. The hospital is extremely well equipped for a relatively small, community facility. However, it does not have renal dialysis equipment for kidney patients. Those patients requiring dialysis must travel as far as 300 miles to receive care.
Several of the staff physicians have proposed that the hospital invest in a renal dialysis center. The minimum cost required for this expansion is $4.5 million. The physicians estimate that the center will generate revenue of $1.15 million per year for approximately 20 years. Incremental costs, including the salaries of professional staff, will average $850,000 annually. Grizzly is exempt from paying any income taxes. The only difference between annual net income and net cash flows is caused by depreciation expense. The center is not expected to have any salvage value at the end of 20 years.
The administrators of the hospital strongly oppose the proposal for several reasons: (1) they do not believe that it would generate the hospital’s minimum required return of 12 percent on capital investments, (2) they do not believe that kidney patients would use the facility even if they could avoid traveling several hundred miles to receive treatment elsewhere, (3) they do not feel that the hospital has enough depth in its professional staff to operate a dialysis center, and (4) they are certain that $4.5 million could be put to better use, such as expanding the hospital’s emergency services to include air transport by helicopter.

Form small groups of four or five persons. Within each group, designate who will play the role of the hospital’s physicians and who will play the role of the hospital’s administrators. Then engage in a debate from each party’s point of view. Be certain to address the following:
a. Financial factors and measures.
b. Nonfinancial factors such as (1) ethical responsibility, (2) quality of care issues, (3) opportunity costs associated with alternative uses of $4.5 million, (4) physician morale, and (5) whether a community hospital should be run like a business.
c. Measures that could be taken to check for overly optimistic or pessimistic estimates.

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  • CreatedApril 17, 2014
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