Create a 5-6 page cost-benefit analysis that supports a risk financing recommendation for a selected organization.
In your current and future role as a healthcare leader, you can expect to conduct a cost-benefit analysis (CBA) to determine whether the positive benefits of a proposed recommendation outweigh the negative costs.
Plowman relates that "a cost-benefit analysis is used to evaluate the total anticipated cost of a project compared to the total expected benefits in order to determine whether the proposed implementation is worthwhile for a company or project team" (2014, para. 1). Plowman also identified the three parts of a CBA to be the following:
Identification of potential costs.
Recording of all anticipated benefits.
Examination of the differences to determine if positive benefits outweigh negative costs.
A pre-formatted Excel spreadsheet that can be used as a template for CBAs is a good tool to have in your personal toolbox. Inputting data is simply the first step. As you fill out templates, always consider the numbers within the context of an organizational mission, strategic direction, patient safety, risk management issues, regulatory requirements, patient and stakeholder satisfaction, and also the dynamics within the healthcare industry.
As you prepare to complete this assessment, you may want to think about other related issues to deepen your understanding or broaden your viewpoint. You are encouraged to consider the questions below and discuss them with a work associate, an interested friend, or a member of your professional community. Note that these questions are for your own development and exploration and do not need to be completed or submitted as a part of your assessment.
What steps do you need to take in order to align a CBA with an organization's mission and strategy?
If you were to offer three alternative recommendations after a CBA, what types of elements would you consider to differentiate them from one another?
How would you substantiate a recommendation for reducing financial risks in a healthcare setting when the quality of care is involved?
What are the three parts of a CBA?
Full Answer Section
. Identification of Potential Costs
The transition to a captive insurance program is not without significant initial costs. These costs can be categorized as direct and indirect.
Direct Costs:
- Feasibility Study: An initial consultation and study to determine the viability of a captive, estimated at $50,000.
- Formation and Licensing Fees: The legal and administrative costs to establish the captive entity, which can range from $150,000 to $200,000.
- Capitalization: The initial funds required to capitalize the captive. Based on actuarial projections, this is estimated to be $5,000,000 for the first year to cover potential claims and meet regulatory requirements.
- Ongoing Management Fees: Annual costs for captive management, actuarial services, legal counsel, and auditing. This is estimated at $100,000 to $150,000 annually.
- Excess Insurance Premiums: To protect against catastrophic losses, the captive will need to purchase excess insurance coverage. This premium is projected at $2,500,000 annually, which is lower than the current fully insured premium.
Indirect Costs:
- Administrative Burden: The internal resources required to manage the captive, including staff time for risk management, accounting, and compliance.
- Increased Risk Exposure: The hospital will assume a greater portion of risk for losses within the captive's retention layer. This requires robust internal risk management and patient safety programs.
- Potential for Capital Loss: If claims exceed initial projections, the hospital may need to contribute additional capital to the captive.
3. Recording of All Anticipated Benefits
The shift to a captive insurance program offers a variety of significant benefits that align with Hopewell's mission and strategic objectives.
Financial Benefits:
- Long-term Cost Savings: The primary benefit is the ability to retain underwriting profits and investment income. Over a five-year period, this is projected to save the hospital approximately $3,000,000 in premium expenses, assuming claims experience remains stable.
- Stabilized Premiums: Captive premiums are less susceptible to the volatility of the commercial insurance market, allowing for more predictable budgeting.
- Enhanced Cash Flow: The hospital can control the timing and amount of capital contributions, improving cash flow management.
Operational and Strategic Benefits:
- Greater Control over Claims: The hospital will have direct control over the claims process, including defense strategy and settlement decisions. This is crucial for protecting the hospital's reputation and clinical mission.
- Improved Risk Management: A captive program incentivizes a stronger focus on internal risk management and patient safety. By directly linking loss experience to financial outcomes, the hospital is motivated to invest in patient safety initiatives, which aligns with its core mission.
- Coverage Tailoring: The captive can be designed to provide specific coverage that may be difficult or expensive to obtain in the commercial market, such as cyber liability or specialized professional liability.
4. Examination of the Differences and Recommendation
A comparison of the total anticipated costs against the total expected benefits clearly indicates that the positive benefits of a captive insurance program outweigh the initial and ongoing costs.
Financial Analysis (5-Year Projection):
- Total Costs (Estimated):
- Initial setup (Feasibility, Formation, Capital): $5,250,000
- Ongoing costs (Management, Excess Premium): $2,650,000 per year x 5 years = $13,250,000
- Total 5-Year Cost: $18,500,000
- Total Benefits (Estimated):
- Current Premium (at 12% annual increase): $3,500,000 (Yr 1) + $3,920,000 (Yr 2) + $4,390,400 (Yr 3) + $4,917,248 (Yr 4) + $5,507,318 (Yr 5) = $22,234,966
- Captive Premium (at $2,500,000 annual premium): $2,500,000 x 5 years = $12,500,000