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The profitability is dropping at Elijah Heart Center (EHC), the coronary care unit, because of high wages to contract nurses, low Medicare reimbursement, and unused equipment, which is not billed. The main points of the financial accounting plan for improving the turnaround of the organization include covering the capital shortage, cost-effective equipment acquisition strategies, and the selection of options for capital expansion.
Capital shortage
Selecting the cost-saving strategies for preventing the potential working capital shortfall, the finance department should focus on saving costs in the long run and ensuring the high quality of the health care services. The optimal cost-cutting options are reducing agency staff and changing the skills mix of the employees. Gordon (2005) noted that “In a cost-competitive system, persons with the lowest level of training who can do the job are employed, under the assumption that higher training leads to greater compensation” (p. 253).
Though a number of researchers criticized the decision of hiring the unlicensed personnel because of its impact on the quality of the services, this strategy allows delegating simple tasks to the less trained workers and reducing costs on their wages because of the salaries of agency-contracted employees are twice as unlicensed assistive staff.
As to the choice of a suitable loan option for maintaining good cash flow, the first option with 9.45 % of the fixed interest rate and without the prepayment limitation is preferable for meeting the cost-saving target. Zelman et al. (2003) noted that “Health care providers are attracted to fixed-rate debt because of the predictability of future payments” (p. 279). On the other hand, the prepayment limitations become a hindrance for closing the loan earlier. Though the interest rate in the first option is higher than in the second one, it is possible to close it in three months, saving the costs in the final analysis.
Reducing the agency staff and changing the skills mix of the employees would allow EHC to save $ 811 249 in the first quarter that is even more than the target, and the loan option without the prepayment limitations would help to maintain the cash flow.
Funding options for equipment acquisition
One of the problems at ECH, causing the drop in profitability of the unit, is the unused equipment, which is not billed, and this issue should be handled for using the available resources effectively. Health care institutions can decide between buying new equipment, buying refurbished equipment, and options of operating or capital lease for replacing the aging equipment. Nah and Osifo-Dawodu (2007) noted that “Cost per use is usually more significant than initial purchase price” (p. 212).
A comparison of the current prices on the equipment in the market is insufficient for selecting the best options. Each of High-Speed CT Scanner, X-Ray Machine, and Ultrasound Systems, which the department plans to buy, should be treated separately for selecting the cost-effective equipment acquisition options in every individual case. Considering the fact that a High-Speed CT Scanner is medium technology equipment, and its useful life is ten years, buying a refurbished one would be an optimal decision. A capital lease is the best option for acquiring an X-Ray Machine because the opportunities for potential technology upgrades are minimal, and this equipment can be utilized for a rather long period of time.
As to the Ultrasound Systems, its useful life is five years, and operating lease is the best option, which allows the department to cut costs on buying the new model and taking advantage of the technological advancements when its useful life is over. Eastaugh (2004) noted that “The main advantage of lease financing is that it allows the healthcare institution to be more flexible with regard to rapid technological changes in medical equipment” (p. 203).
The outcome of implementing various strategies for buying refurbished health care equipment or deciding between the capital and operating lease options would allow using the resources effectively and considering the demands of upgrading the equipment when it is necessary.
Funding options for capital expansion
As to the third issue of choosing the strategies for capital expansion, the option of the HUD 242 Loan Insurance Program is the most effective strategy, which is helpful for maintaining the successful turnaround of EHC. Gregg, Knott, and Moscovice (2002) noted that “The HUD 242 program has made billions of dollars available for hospital projects that otherwise might not have been completed” (p. 41). This funding option allows saving costs in the long run and is the optimal decision for this coronary care unit.
The loan maturity is 25 years, while the annual premium of 0.5 % coupled with 3.40 % of bonds of the cost funding is the advantage of the strategy.
Swayne, Duncan, and Ginter (2006) noted that the examination of the financial resources is prior to the selection of capital expansion strategies (p. 398). The outcome of the implementation of the chosen strategy was not only the maintenance of the cash flow at EHC but also the expansion of the capital, which opened up new opportunities for further development of the unit.
Summary and conclusions
Working on the simulation plan, I learned the main financial indicators, which are crucial for developing a cost-effective program for bridging the capital shortage, acquiring health care equipment, and expanding the capital, taking into account the long-run perspectives of the health care unit.
If I performed the simulation again, I would pay more attention to the selection of other equipment acquisition strategies analyzing their advantages in a particular health care environment.
It is important that the simulation plan helps to establish the cause-and-effect relationships between the implementation of effective strategies and their impact on the turnaround of the whole unit. The knowledge of the available options of equipment acquisition would be valuable for my job.
Reference List
Eastaugh, S. (2004). Health care finance and economics. Sudbury, MA: Jones and Bartlett Publishers.
Gordon, S. (2005). Nursing against the odds. New York, NY: Cornell University Press.
Gregg, W., Knott, A., and Moscovice, I. (2002). Rural hospital access to capital: issues and recommendations. University of Minnesota Rural Health Research Center- Working Paper 41.
Nah, S., and Osifo-Dawodu, E. (2007). Establishing private health care facilities in developing countries: A guide for medical entrepreneurs. Washington, DC: The World Bank.
Swayne, L., Duncan, W., and Ginter, P. (2006). Strategic management of health care organizations. Malden, MA: Blackwell Publishing.
Zelman, W. et al. (2003). Financial management of health care organizations: An introduction to fundamental tools, concepts, and applications. Malden, MA: Blackwell Publishing.
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