An excel model was used to forecast the future performance of the hospital. A default 10 percent growth rate has been entered for all financial reports generated for the hospital. Therefore, with the model, the constant growth rate method will be the easiest method to carry out a forecast of the hospital’s financials. This implies that each item in the financial statements will be analyzed based on an underlying assumption that will be made with regard to current healthcare market conditions as well as current trends in the healthcare industry. In addition, linear regression will be carried out to determine the relationship between total revenue and total expenses, total revenue and total assets. The assumptions that have been made have been presented and have been supported with facts collected from credible sources.
The arbitrary set growth rate is 10% for net patient service revenue. However, due to increase in the number of people covered by health benefits in the United States the net patient services revenue is set to increase mainly because more people have access to health care facilities. According to the United States Census Bureau 84% of the entire population had access to different forms of health benefits, this implies that a larger number of people will seek medical services increasing the revenue. In addition, the new Patient Protection and Affordable Care Act enacted in 2010 has gone a long way to improving accessibly to healthcare facilities for United States citizens. Lastly, the hospital has passed the accreditation of the Joint Commission and this implies that its reputation among patients will be excellent. The forecasted growth rate in revenue is expected to be 15%.
It is also assumed that expenses are highly reliant on revenue. This is mainly because in order for the clinic to stay operational its expenses must be less than the revenue. From the regression model it is evident that 99.7% of expenses can be explained by the total revenue. Therefore, it is assumed that the increase in revenue will also lead to an increase in expenses. Thus, a 15% growth forecast is also expected for all expenses except salaries and wages.
An increase in the number of patients due to increased healthcare benefits will lead to an increase in assets in order to meet the needs of these additional patients. This is mainly because the hospital needs to invest in hospital equipment and inventory in order to increase its capacity to deal with the increase in patients. Inventory is forecasted to increase by 20% while gross plant and equipment is forecasted to increase by 12%. This will be in line with trying to keep up with the increase in the number of patients who come to the hospital.
Below are the pro forma financial statements as well as the forecasted ratios as a result of the above forecast.
Pro forma Statements of Revenues and Expenses:
Pro forma Balance Sheet:
References:
United States bureau of labor statistics (2013) CPI Retrieved February 27, 2013, from http://www.dol.gov/ebsa/healthreform/
United States Department of Labor (2013) Patient Protection and Affordable Care Act. Retrieved February 27, 2013, from http://www.dol.gov/ebsa/healthreform/
