Healthcare Finances Book Review
Question 14.1
Payback is a breakeven measure showing the expected length of time, usually in years, needed to recover investment cash outflows from cash inflows. The shorter the payback, the more liquid and the less risky the project is.
NPV is a profitability measure defined as the difference between the present values of all cash inflows and outflows. Projects with positive and negative NPV are expected to result in profit or loss respectively while NPV equal to 0 indicates only recovery of investment.
IRR also measures profitability but, unlike NPV, in percentages and not in dollars. As IRR is the discount rate with which the NPV becomes equal to 0, it indicates a profit if exceeding the cost of capital of the project and a loss if being less than the cost of capital.
MIRR is the more accurate version of IRR since it uses not the IRR, but the cost of capital as a reinvestment rate.
Question 16.3
Marketable securities are held instead of cash balances to earn interest. Large funds required for meeting a capital expenditure or any other specific near-term obligation are accumulated in the form of marketable securities.
Safe and liquid securities are most suitable for holding as marketable securities since they ensure ready availability and minimal risk that health services prefer to high returns.
Since capital expenditures will be made in yearly intervals, the marketable securities portfolio should consist of short-term investments comprising securities maturing in between three months and a year. The medical clinic should use the large sum of $6000000 to create a portfolio of safe and liquid securities such as Treasury bills or negotiable certificates as the Clinic can afford the portfolio management costs.
The physical therapy group should buy securities maturing in three months or less since it may need the cash at any moment. It can invest with a bank or mutual fund to avoid any portfolio management fees.
Question 16.5
JIT is an inventory system that allows health service companies to receive inventories when the need arises from outside suppliers who can discharge the inventory management function more efficiently.
JIT can significantly reduce inventory and facilities costs by eliminating the need for storing large inventories in case they are urgently required and by converting warehouses to more cash-generating uses. Hospitals can achieve considerable total inventory cost reduction even incurring supply fees. JIT also has some disadvantages as hospitals relying on a single supplier for inventory may become too dependent and face increased prices. There is also the constant risk of unavailability of crucially needed supplies.
JIT can certainly be used by healthcare providers as they can choose the system that suits them best. The supplies can be delivered to the clinic’s loading dock, to special supply rooms, or immediately to clinic departments, and supply fees can be tied to the amount of patient …
