| Over the past few months, the proposed healthcare | | | | there a need for a second one? One might argue that |
| reform has been the subject of much discussion and | | | | the high demand for usage creates tension between |
| the healthcare industry has come under intense | | | | employees, wear and tear of the machine increases |
| scrutiny as a result of the administration's efforts to | | | | maintenance costs, overtime pay for the technicians' |
| curtail the increasing cost of healthcare. As an | | | | increases overhead costs and the hospital is left |
| offshoot of the increasing cost of healthcare now | | | | vulnerable in the event that the current scanner seizes |
| more than ever hospitals have been placed in a | | | | to function. These are all valid considerations. However, |
| situation whereby capital budgeting has become a | | | | one wonders; does the total benefit exceed the total |
| necessary tool; Not only for sustenance but mostly for | | | | cost? |
| survival. Absence of a sound capital budgeting policy | | | | The last scenario is a group of doctors working for the |
| might potentially spell disaster for hospitals because an | | | | hospital propose the purchase of a special machine |
| increase in cost accompanied by a decrease in | | | | that eliminates the need for in house hospitalization of |
| revenue negatively impacts the bottom line and when | | | | patients. With the new machine comes the benefit of |
| funds are limited, it is essential to have a game plan of | | | | reduced hospitalization. With reduced hospitalization of |
| how the funds are to be used otherwise the hospital | | | | patients, the hospital might be better placed to reduce |
| might find itself in a precarious situation. | | | | variable costs associated with the use of the facilities |
| Capital budgeting refers to the analysis of investment | | | | and safety might be enhanced because the possibility |
| alternatives involving cash flows received or paid over | | | | of the hospital exceeding capacity will be greatly |
| a certain period of time. More often than not, the best | | | | reduced by having fewer patients in the facilities. The |
| alternative is usually the one that yields the greatest | | | | only drawback is the massive costs involved. The |
| cash flow over time. This point can be disputed | | | | machine requires a large capital outlay upfront. |
| because other hospitals might place much emphasis | | | | Therefore, in as much as the purchase sounds good, |
| on non-monetary results. In such cases, the best | | | | the other alternatives sound equally as good if not |
| alternative is usually the one that comes as close as | | | | better. |
| possible to yielding results that catapults the hospital | | | | Faced with the three alternatives, a financial manager |
| closer to its objectives. Capital budgeting is a | | | | in the healthcare industry should determine the |
| complicated process in the sense that great care has | | | | opportunity cost of capital. Opportunity cost of capital |
| to be taken in the selection process and competing | | | | works on the fundamental law of finance that states |
| forces makes it the more challenging. Where there is | | | | that a dollar today is not the same as a dollar |
| competition, the possibility of politics being a factor is | | | | tomorrow. Therefore, when analyzing the three |
| heightened and politics often times has its drawbacks | | | | alternatives, the time value of money should not be |
| especially when the voice of the minority is drowned | | | | ignored because one might come to a wrong |
| out by the majority or the louder voice. | | | | conclusion if one doesn't consider the time value of |
| In order to better understand how capital budgeting | | | | money in the analysis. Future cash flows are |
| works in the healthcare industry, we'll explore three | | | | discounted to the present value using a stated interest |
| different scenarios that do play out every once in a | | | | rate. Once the present value of all the alternatives is |
| while in most hospitals throughout the country. For | | | | established, then the alternative that yields the highest |
| instance, Human Resources propose a day care | | | | present value is considered to be the best option. This |
| facility for employees with children. Justification being: | | | | method of analysis is known as the discounted cash |
| turnover rate of employees will be minimized and more | | | | flow method and from a personal standpoint; this |
| nurses will potentially be attracted to the hospital | | | | method should be used widely in the healthcare |
| because of the day care services offered. Turnover is | | | | industry because it is guided by the important law of |
| costly to the hospital. Therefore, even though the | | | | finance stated above. I acknowledge the fact that |
| project does not increase revenue, the project will get | | | | each hospital is unique and estimating the future cash |
| to benefit the hospital through reduced costs. | | | | flow is difficult in other instances. In this case, other |
| The second scenario is the Imaging Services | | | | methods should be considered. However, discounted |
| Department proposes the purchase of an additional | | | | cash flow method though imperfect at times should be |
| CT scanner to ease the bottleneck and the backlog of | | | | given first priority if all else is clear and all the variables |
| work in the department. Purchase of a scanner is quite | | | | are known. |
| costly and therefore, if the present one is functional is | | | | |