Essay On Cash Flow In Health Care

The beginning of the 21st century has provided challenges for the American public since the time of our ancestors that lived through the Great Depression. Regardless of the industry, currency is in short supply. Capital, worth, and the company’s value, is the challenge. Cash flow is extremely important for administrators at this perplexing time in history; alterations to this cash flow issue require a inflexible level of explanation, especially as the cash amount of the adaptation increases. This brutal state of mind is in conflict with the understanding that coincides with decisions made in the current health care industry. Emotions run rapid in all areas of healthcare when quality-of-care decisions are made regarding the welfare of patients. When do healthcare organizations need to give in and spend their coveted money?
It’s the stance is pretty simple any capital acquisition, or capital expenditure, needs to have a reasonable and lucrative Return on Investment for investors to deem it a valuable disbursement of cash for a corporation. This type of thought process is not explicit to the healthcare industry; however, it is intensely necessary in keeping a healthcare organization aggressive in such a many-sided field. The multifaceted environment of the healthcare industry is distinctive, and provides a difficult atmosphere to conduct
business and endorse change. The concept of Return on Investment is presented in a rather drawn out, yet comprehensive, explanation of the capital expenditure process. Technology has transformed and reshaped the healthcare industry.
Imaging has changed the way we diagnosis, laboratory testing has morphed into a procedure with lightning speed results, managed care companies have smart-phone applications, and consumers are using technology to educate themselves about their illnesses. I have to pose the following question: if Health Information Technology can advance this evolution of technology through Electronic Medical Records (EMR) why does every Healthcare Organization (HCO) not utilize them? The answer is simple: the technology is expensive and requires rationalization for
expenditure.
The fundamental components of the Discount Cash Flow (DCF) method include a Net Present Value Analysis, Profitability Index, and an Equivalent Annual Cost Calculation. These three values will determine the “financial or economical viability of the product.” (Cleverly 429) Cleverly defines the NPV as “the difference between the initial amounts paid for the initial investment and the associated potential cash inflows after they have been adjusted (discounted) by the cost of the capital” (529). Net Present Value is an important tool especially in the case where there are several payment options for a product or equipment to be purchased and used over a period of time.
For example, if the electronic medical record Company provides an option to either purchase the EMR (valued at $46,400.00) for an initial investment of $13,100 with a 6% Discount Rate, the NPV can be calculated to be -$5,240.00. This was calculated as follows: Rate x initial investment (6% x $13,100.00) = $5,240.00, minus the initial investment ($5,240.00-$13,100.00) equaling our total, -$7,860.00.
The second financial method in the analysis portion of capital expenditure rationalization is the Profitability Index. The way in which to calculate Profitability Index is by taking the NPV and divide it by the investment costs. The Profitability Index is therefore calculated to be 0.60 (-$7,860 / $13,100.00). In the text, the author points out that all projects with profitability indices greater than zero should be funded.