Healthcare Finance Questions

1. Community Hospital has annual net patient revenues of $150 million. At the present time, payments received by the hospital are not deposited for six days on average. The hospital is exploring a lockbox arrangement that promises to cut the six days to one day. If these funds released by the lockbox arrangement can be invested at 8 percent, what will the annual savings be? Assume the bank fee will be $2,000 per month

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To calculate the annual savings from implementing a lockbox arrangement, we need to calculate the amount of money that will be freed up by reducing the payment processing time, and then calculate the interest earned on this amount at a rate of 8 percent.

1. Calculate the average daily revenue that will be released by the lockbox arrangement:
- Annual net patient revenues: $150 million
- Number of days in a year: 365
- Average daily revenue: $150 million / 365 = $410,958.90 (rounded to 2 decimal places)

2. Calculate the reduction in payment processing time:
- Current payment processing time: 6 days
- Reduced payment processing time with lockbox: 1 day
- Reduction in processing time: 6 - 1 = 5 days

3. Calculate the amount of money that will be freed up by the lockbox arrangement:
- Average daily revenue freed up: $410,958.90
- Amount freed up by lockbox: $410,958.90 * 5 = $2,054,794.50 (rounded to 2 decimal places)

4. Calculate the annual savings from investing the freed-up funds at 8 percent interest:
- Annual savings: Amount freed up by lockbox * (interest rate / 100)
- Annual savings: $2,054,794.50 * (8 / 100) = $164,383.56 (rounded to 2 decimal places)

Therefore, the annual savings from implementing the lockbox arrangement will be approximately $164,383.56. Please note that this calculation does not consider the bank fee of $2,000 per month.

$164,712.31