Financial Recovery Strategies: A Hospital Case Study

Abstract

This case study revolves around a financially meager hospital, which is in this business since last 20 years. This hospital has been enjoying its highs in terms of monetary growth but due to increasing wage rates of employees and rising costs of materials, their financial statements shows that this hospital is generating all time lowest profits since its inception. This hospital has many departments, some of which are profit-generating arms of the hospitals while some departments are a burden on the balance sheet of this hospital.

Their senior management needs to take a hard decision to overcome such a situation when they are near to a disaster. There are three options available, but its very tough to choose one of the option that will turn out to be a good decision. This makes a big decision problem in such a scenario.

This case study tested the readers with optimistic, pessimistic, minimum regret and risk neutral approaches of decision-making. Based on the available options or alternatives, a decision tree was made that calculated the options, the expected outcomes from each option and the probability of economic growth rise as well as its decline.

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Introduction

(ANTH) is a private hospital; ANTH is in business since the past 20 years. They are affiliated with one of the very renowned college and university (SZABMU). Offering different medical services like ENT, Anaesthesiology and Perioperative Care, Dermatology, Emergency Medicine, Family Medicine, Geriatric Medicine & Gerontology, Basic and Clinical Immunology, Cardiology, Endocrinology, Gastroenterology, General Internal Medicine and Primary Care, Neurological Surgery, Neurology, Obstetrics & Genecology.

Sole Purpose

The sole purpose / objective of building this institute so that the student could excel their academic and professional skills. This hospital has 2000 beds consisting of 50 wards, OPD, emergency department, along with other managements departments like admin, HR, IT, procurement, finance and etc. Finance department is directed by XYZ who is responsible of handling all the cost / budget related activities.

Grouping of Staff

Their staff can be grouped into the following for the better understanding:

1. Medical Staff,
2. Nurses,
3. Allied Health Professionals and
4. Other Management Staff

Problem Statement

Time is slow for this hospital right now and with the rising cost of materials and wages, their profits are at the lowest. Because of this unfortunate situation, we need to let some employees and staff go. The senior management team which include the chairman and other directors and stakeholders has already compiled the list of people whose employment will be terminated within one month from today.

Action Taken

They called a meeting of departmental senior heads, managers and stake holders. The heads and managers didn’t know that a list has been created, so we have to let them know during the meeting. Also, they will not be able to see list until the day of the terminations. Evidently, this is a very confidential topic and not to be shared with anyone outside of these officials.

The purpose of this meeting is to get confidence of everyone in this group and assure them that none of them is on this list. You also want to get their feedback on how the general employee base will react to the news and event in two weeks. Next, we would like to understand and anticipate any questions that they believe will arise so that appropriate answers can be prepared. Finally, we would like to devise an action plan for the day after the event. What we can tell the managers is the number of people they will each be losing, if we find that information important to share.

Here is the breakdown:

• Medical Staff will lose 23 of this 200 people
• Human Resource will lose 4 of its 20 people
• Nurses will lose 80 of its 400 people
• Allied Health Staff will lose is 19 of its 128 people

Solution Proposed

After the detailed meeting and review of the operations of laying off their employees, chairman, director finance and director management sat with strategic team and considered the following options.

Option 1:

Fire the old employees / staff and bring in the new automatic monitoring machines for patients (because 80 of the nurses and 23 of medical staff are being lay off form the hospital) and hire low wage doctors, nurses and management staff. This process can be able to reduce the costs. Director Management was against this option since it would rock the foundation on which the hospital / institute was built. Besides the productivity could be insufficient, giving bad reputation of the hospital, a huge bill for the new automatic machines, and law suits.

Option 2:

Because of this low business situation all the best earning departments and the low earning departments should save some extra cost by cutting some of their extra cost’s effective activities. Also reducing they’re some of basic salary and additional incentives. Because of reducing their basic wage and incentives their productivity and the performance at work would suffer so that the hospital could lose their productive image in the market, hence loss of more business.

Option 3:

Some of the department are on the low on business generation and some of them are very good at making the business, by reducing the area of low business department and give the other remaining area to that department who is doing good in business generation. Because of this departmental change, new or increased of a work load upon the existing staff so that the deadlines of the tasks could not be meet on the time. It also adds some additional cost on shifting or settling down the interior or pathways to merge / increase the area of operation for the departments.

States of Nature

• Option 1: Nature of state is high, insufficiency of the patient’s needs, the bad reputation with the increased cost of the new automatic machines. Not advisable
• Option 2: Nature of the state is low; cost can be saved but with the reduction of the work performance.
• Option 3: Nature of the state is uncertain, longer time for the shifting and merger of the department, higher initial cost due to shifting new equipment.

Normally it shows only informational arcs from the alternatives to a decision. Laying off the staff is drawn is rectangle because it is showing us the main decision node of this hospital. We are also suffering consequences of new machines and staff gap so we are representing it in diamond. States of nature are also shown in circles. Each of them is interlinked to show the closed form of the decision.

Financial Decision Tree Analysis

The financial implications of each option are analyzed using decision trees, incorporating the probability of economic growth or decline. This analysis helps visualize the financial outcomes and probabilities associated with each decision.

Then the finance department in which possible economic growth rise and decline were also determined and defined on other decision tree based on its economic growth rate and finance. Each cost budget is given in which if the hospital will hire new costs keeping in mind their states of nature they will suffer would be 70,000. And if the company is willing for firing the old staff and employees to manage their cost and budget expected outcome would be 500.000. as per estimate of the current cost rate the new machines will cost hospital the 700,000. If setting the probabilities we see the different results of the outcomes that are determined in the following. (write more stories)

Table 1: Criteria and Their Weights

Table 2: Decision Outcomes and Probabilities

Expected Value Calculations:

• EV Laying Off: 0.2(530,000) + 0.8(400,000) = €426,000
• EV New Machines: 0.9(250,000) + 0.1(-250,000) = €200,000
• EVPI (Economic Value of Perfect Information): €426,000 - €200,000 = €226,000

Summary

The objective of this paper is to present, discuss, and apply the principles and techniques of the analytic hierarchy process (AHP) in the prioritization and selection of projects in a portfolio. AHP is one of the main mathematical models currently available to support the decision theory.

Current Criteria Used in the Prioritization of Projects

Although decisions are based on values and preferences of the decision makers, a set of criteria or specific objectives can be used while prioritizing projects, determining the real meaning of an optimal relationship between benefits, and costs. The main criteria groups are:

• Financial – A group of criteria with the objective of capturing the financial benefits of projects. They are directly associated with costs, productivity, and profit measures. A few examples are:
• Return on Investment (ROI) – It is the percentage of the profit margin of the project. It allows comparing the financial return of projects with different investments and profits.
• Profit (currency) – The value (in currency) of the financial profit gained by the project. A project may have a smaller ROI but its nominal profit can be bigger.
• Net Present Value (NPV) – It is the difference between the project benefits and costs, taking into consideration that all incomes and expenses are converted to be realized in the current date. In order to do so, it is necessary to bring all future values to the current date by using a given interest rate. This allows the assessment and comparison between projects that have future incomes and expenses from different times.
• Payback – It is the number of time in periods necessary to recover all of the original project investments.
• Financial Benefit/Cost Rate – It is the ratio between the present value of the benefits and the present value of the costs. The higher the ratio, the more viable is the project under the perspective of benefit/costs.
• Strategic – A group of criteria directly associated with the strategic objectives of the organization. The strategic criteria/objectives are determined by methods used to cascade corporate strategy like the balanced scorecard. They differ from the financial criteria, because strategic criteria are specific for any organization. Organizations with different strategies will certainly have different prioritization criteria. Some examples may be to increase the capacity to compete in international markets, to use eco-friendly practices, to optimize internal processes, to cut expenses in comparison with benchmarking competitors, and to improve the reputation of products and services.
• Risks (Threats) – It determines the level of risk tolerance that an organization accepts to execute a project. The threat-based risk assessment criteria can also incorporate the assessment of opportunities . However, often the assessment of opportunities that a project can yield are already covered and taken care of by the strategic criteria. Another equally possible perspective for this criterion entangles the organizational risk of not undertaking the project.
• Urgency - It determines the urgency level of the project. Projects considered urgent require immediate decision and action, and so they have a higher priority than projects that are not urgent.
• Stakeholder commitment – A group of criteria that aims to assess the level of stakeholder commitment toward the project. The higher the commitment to the project, the higher priority the project receives.

Commitment may be assessed in a broad manner in which all stakeholders are considered as a unique group, or it can be decomposed into different stakeholder groups, like, for example:

• Community commitment
• Organizational commitment
• Regulatory bodies
• Project team commitment
• Project manager commitment

Technical Knowledge – It assesses the technical knowledge necessary to execute the project. The more technical knowledge that is readily available, the easier it will be to execute any given project and, consequently, it will cause the project to use fewer resources. It is important to note that, if it is necessary to establish criteria or objectives related to the learning and growth process, these criteria need to be associated with the organization's strategic criteria.

Analytic Hierarchy Process

The multi-criteria programming made through the use of the analytic hierarchy process is a technique for decision making in complex environments in which many variables or criteria are considered in the prioritization and selection of alternatives or projects. We will develop an AHP for his hospital keeping in mind our values and will discuss the criteria in detail based on our alternatives as discussed above.

We will begin the application of AHP begins with a problem being decomposed into a hierarchy of criteria so as to be more easily analysed and compared in an independent manner. After this logical hierarchy is constructed, the all the decision makers can systematically assess the alternatives by making pair-wise comparisons for each of the chosen criteria. This comparison may use concrete data from the alternatives or human judgments as a way to input sub adjacent information.

Conclusion

Based on the analyses, the hospital must weigh the financial benefits, strategic alignment, and potential risks of each option. The AHP analysis can further refine this decision by providing a structured framework to evaluate the criteria against the hospital's strategic goals. Ultimately, the choice should align with the hospital's long-term vision, financial stability, and commitment to providing quality healthcare services.