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- Title
HOSPITAL INVESTMENT AND MEDICARE REIMBURSEMENT.
- Authors
Dran Jr., John J.; Campbell, Brian E.
- Abstract
The state of the art of capital investment analysis for hospitals has been described as "primitive" [1, p. 512]. Quantitative models portraying unique aspects of hospital investments are scarce. Literature in this area is primarily devoted to discussing how traditional capital budgeting techniques may be modified for use in the analysis of hospital investments [1, 2, 141. For example, Wacht [14] and Berman and Weeks [1] have proposed techniques that integrate analysis of non-monetary benefits with discounted cash flow methods. Despite the exposure given to these ideas, very few hospital capital investments are evaluated using discounted cash flow methods [16] Another portion of the literature on hospital capital investment analysis describes a large variety of difficulties encountered when traditional capital budgeting techniques are used in the hospital setting [1, p. 515; 5; 7; 16] . These problems are often cited to rationalize why hospitals do not employ objective evaluation criteria for their financial decision making. Nevertheless, most of these obstacles occur to some degree or other in industries where objective techniques of financial analysis are used far more extensively. One of the major arguments against the use of objective financial evaluation of capital investments is the idea that because the primary goals of hospitals are non-financial goals, financial considerations are only of secondary importance. However, in order to achieve these non-quantitative goals the hospital must survive, and survival requires consideration of the financial aspects of any investments that are undertaken. Thus, although the not-for-profit hospital might not be expected to follow exactly the behavior of profit-maximizing firms, models developed for the profit-oriented firm do have certain applicability in the hospital industry. The aim of this study is to examine the effects of Medicare reimbursement on hospital capital investment. To do this a simple model is developed. In the model, we derive the Net Present Value (NPV) of new hospital investments financed with debt and equity. The NPV of equity-financed and debt-financed replacement investments is also developed. In each case the NPV is always less than zero, indicating that any capital investment under Medicare reimbursement is financially unsound. The implications of this finding are considered.
- Subjects
HOSPITAL prospective payment; CAPITAL investments; HEALTH insurance reimbursement; INVESTMENTS; MEDICARE; DISCOUNTED cash flow; EQUIPMENT financing; INVESTMENT advisors
- Publication
Journal of Financial Research, 1981, Vol 4, Issue 2, p147
- ISSN
0270-2592
- Publication type
Article
- DOI
10.1111/j.1475-6803.1981.tb00617.x