Assume that you have recently been hired as the special assistant to the chief executive officer (CEO) of your health care organization. Your duty is to head up the new quality improvement department. Over the past year, the hospital has experienced substantial growth but is also facing a number of patient safety concerns, including a steady increase in medical errors and a 25% rise in hospital-acquired infections. Based upon what you have learned in this course, prepare an action plan to present to the CEO with strategies for addressing these issues.
Write a 1,000- to 1,250-word action plan that includes a separate 150- to 300-word executive summary for the CEO. Address the following:
• Identify the issues the hospital is currently facing and how they are affecting quality outcomes and endangering patients.
• Present a detailed plan to improve quality and elaborate on how it aligns with the hospital's initiatives to improve value-added health care. Discuss the quality improvement tool you suggest using to locate and ameliorate problem areas, as well as the roles and responsibilities of involved stakeholders, financial considerations for the implementation of your plan, the goals of the plan, and methods for evaluating its success.
• Describe the effects that the implementation of this plan will have upon administrators, clinicians, and physicians. Explore possible challenges that could arise with stakeholders reacting negatively to changes presented by this proposed plan. What strategies or preventive measures could be put in place to reduce the friction between various health care providers?
• How will your plan improve overall quality for the hospital? How will the improvements your plan suggests implementing now set the hospital up to continue providing quality care in the future? What will happen in the future if nothing is done to correct the current issues?
Sample Answer
The best capital budgeting method depends on the project's characteristics and the organization's priorities. I'll describe a common corporate monetary decision and explain why the Net Present Value (NPV) method is often the superior choice.
Capital Budgeting Example: Equipment Replacement
A frequent monetary decision in my professional context (simulating a healthcare or manufacturing setting) that requires capital budgeting is replacing a critical piece of operational equipment.
Scenario: A regional hospital needs to replace its 10-year-old MRI machine. A new, faster MRI machine costs $2 million and is expected to last seven years. This new machine will increase patient throughput by 20% due to its speed and reduce maintenance costs by $50,000 annually. This increased capacity is projected to generate an additional $450,000 in annual cash flow from increased billing. The hospital's required rate of return (or cost of capital) is 10%.
The decision is: Should the hospital invest $2 million today for a project that yields $450,000 annually for seven years?
Chosen Capital Budgeting Method: Net Present Value (NPV)
As a manager, I would choose to utilize the Net Present Value (NPV) method to make this investment decision.
NPV=t=1∑n(1+r)tCt−C0
Where:
Ct = Net cash inflow during period t
C0 = Total initial investment cost
r = Discount rate (cost of capital)
t = Number of time periods
Why NPV is Chosen Over Other Methods
I choose NPV because it is the most theoretically sound method and directly aligns with the primary financial goal of maximizing shareholder (or stakeholder) wealth.
1. Superiority to Payback Period
The Payback Period (calculating how long it takes to recoup the initial investment) is a useful measure of liquidity, but it ignores the time value of money and cash flows occurring after the payback period.
Example Drawback: A project might have a short payback period (good liquidity) but generate no cash flow in its later years. NPV, by discounting all cash flows across the entire seven-year life, provides a complete financial picture, unlike the Payback Period.
2. Superiority to Accounting Rate of Return (ARR)
The Accounting Rate of Return (ARR) is calculated using net income (which includes non-cash depreciation) rather than cash flow.
Example Drawback: ARR is a ratio based on accounting numbers, not on the actual cash available for reinvestment. Furthermore, like the Payback Period, ARR ignores the time value of money, treating cash flows received in Year 1 the same as cash flows received in Year 7. NPV provides a more economically accurate rate of return because it focuses purely on discounted cash flows.
3. Superiority to Internal Rate of Return (IRR)
The Internal Rate of Return (IRR) is the discount rate that makes the NPV of a project zero. We accept projects where IRR is greater than the cost of capital (10%). While often similar to NPV, IRR has critical flaws, especially when comparing multiple projects:
Non-Conventional Cash Flows: The MRI replacement project has conventional cash flows (initial outflow, subsequent inflows). However, projects with multiple changes in cash flow direction (outflow → inflow → outflow) can yield multiple IRR results or none at all, making the method unusable.