Case Study

Healthcare Financial Feasibility: What Is Your CPA Firm Missing?

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A partially completed jigsaw puzzle reveals the image of a US 100-dollar bill. Credit: Baris-Ozer.

The Challenge: To help our client analyze the potential for a new bed tower after a previous project was hampered by bad projections.

The Background 

A health system was considering a $70 million USDA loan to build a new, 65-bed tower on a satellite campus – but leadership was hesitant due to large financial deficits from an earlier expansion on the main campus. In that instance, just two years prior, a traditional accounting firm had completed the feasibility study using assumptions provided by management. Without a deep understanding of healthcare markets, the CPAs were in no position to evaluate projected volumes, which proved to be inflated.

Debt from the earlier project made it hard to justify a second expansion, even though the trends were compelling: While much of the county had an aging, dwindling population, commuter suburbs at the extreme southern end of the county were enjoying a population boom. Our client had recently opened a thriving outpatient campus in that part of the county, but was there enough demand to support a major investment in inpatient beds?

Management hired Ascendient to answer that question.

Our Work 

As we would with any business planning engagement, we set out to forecast utilization of the proposed new facility based on seven factors:

  1. Patient origin data and service area definition
  2. Forecasted population in the service area
  3. Socioeconomic characteristics of the service area
  4. Competitive environment
  5. Medical staff
  6. Service area use rate trends
  7. Market share trends

Unlike the usual business planning engagement, we documented every assumption and calculation in an exhaustive, 60-page report that was considered debt-ready for USDA standards.

Using three to five years of historical data from both the client’s inpatient and outpatient facilities, we constructed detailed utilization forecasts for each new service area at the new hospital: medical/surgical, obstetrics, pediatrics, and behavioral health. We layered on population trends as well as “macro” healthcare trends such as payment reform to calculate precise, service-specific forecasts for:

  • Admissions
  • Patient days
  • Length of stay
  • Occupancy rates

Recognizing that providers are the key to any forecast, we conducted a deep dive into medical staff demographics, admissions, and attitudes. Beyond the quantitative data, we conducted extensive interviews to determine how physicians viewed the new facility and whether they would be willing to practice there.

Finally, we conducted a five-year look-back at every aspect of the client’s financials, with a special emphasis on payer mix, including projections for the impact of payment reform.

 

Our Findings 

In short, despite existing debt loads, our analysis indicated that additional investment was the key to sustainability for our client.

As the only health system in the county offering inpatient beds, our client enjoyed unusual market share in both the primary and secondary service areas – yet the future was far from certain.

The main campus, with its expensive bed tower, was located in the geographic center of the county, making it relatively convenient for an older, more dispersed, rural population. But for younger families living in fast-growing suburbs at one end of the county, the current hospital was not the obvious choice. They could just as easily reach a much larger tertiary hospital in the nearby city where they already commuted for work.

Our client’s suburban outpatient campus had attained 30% market share immediately after opening, indicating that residents preferred the convenience of local healthcare, even if an urban competitor offered greater services. Suburban residents also had higher rates of commercial insurance, indicating that a new hospital would enjoy stronger operating margins than the existing facility, where more patients were covered by Medicare and Medicaid.

Crucially, we also found that providers wanted the new hospital, viewing it as an asset for recruiting and revenue. As the only hospital in the county, our client enjoyed deep loyalty among some 300 private-practice physicians with admitting privileges. Those providers were alarmed to watch elective and emergent patients leaving the county to get services elsewhere, and they wanted to see a strategic response that would bolster the long-term outlook for their practices.

 

The Outcome

Reassured by our in-depth financial feasibility work, the board approved plans for a new hospital, and funding was finalized in short order. The new facility opened to great local fanfare and quickly found a loyal base of patients – though not as many as we had forecast, admittedly.

A year after the initial contract ended, we were called back to the county to diagnose the problem. Systemwide volumes matched our projections, but more patients than expected were going to the main campus, while fewer were choosing the satellite.

The problem turned out to be providers rather than patients. During the financial feasibility study, physicians had committed to coverage levels that never materialized once the building was complete. Without too few doctors onsite, patients couldn’t get the quick, convenient access they expected, undermining the entire value proposition of the $70 million investment.

Once management stepped in to rationalize provider coverage, patient volumes rose quickly, and the new hospital thrived. With growth continuing through the years, Ascendient has been back to the county repeatedly to update forecasts and business plans.

 

The Takeaway

Financial feasibility is driven by assumptions. Accounting firms tend to say, “You give us the volume assumptions and we’ll apply our financial expertise.” But bad assumptions can have disastrous consequences, as our client discovered on an earlier project.

Likewise, even the best assumptions can be undermined by poor execution. When projections don’t pan out, CPA firms are ill-equipped to diagnose and correct the problem.

When tens of millions of dollars are at stake, you need expertise that traditional accounting firms can’t offer. With 30 years of comprehensive healthcare experience, Ascendient offers financial feasibility services based not only in a detailed understanding of today’s market, but also in the future trends driven by healthcare transformation.

Looking for a feasibility study that combines flawless financial analysis with deep healthcare expertise?

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