Assume you are the financial director of a clinic that is a part of an organization named Getwell Clinics Incorporated. Your clinic—named after you—serves a suburban community with a population of about 24,000, of which 25% are expected to become patients of the clinic. Each patient is expected to average five visits per year. Assume one physician, on average, will examine 4 patients per hour for 7.5 hours each day. Also assume that the office is open for patient visits 20 days per month. Assume that visits occur evenly throughout the year. The average physician’s salary is $11,000 per month. The current practice is fee-for-service and includes Medicare and nonMedicare patients. The clinic has been approached by several HMOs to provide services to their enrollees, but the board of directors has decided to defer participation until year 2015.
After adjustments and allowances, average charges are $50 per visit. You believe that patient receivables are too high. You expect to improve collections, resulting in a balance of $220,000 patient receivables at the end of the year.
The flexible budget for operating costs for the clinic is as follows:
Operating Costs
Variable Expenses per Visit Fixed Expenses per Month
Nurses’ salaries 0 $18,000
Administrative and technical salaries 0 $19,000
Medical supplies $6.00 0
Rent 0 $4,000
Service bureau for medical and financial records $1.00 $2,000
Other operating expenses $3.00 $6,000
Planned purchases of medical supplies are $16,000 per month. Supplies are paid in the month following purchase. Service bureau expenses are paid in the month following service. All other expenses are paid in the month of incurrence.
During year 2015, your clinic plans to purchase $80,000 worth of equipment, which will depreciate on the straight-line basis over 5 years. A $75,000 line of credit has been arranged at the bank if needed. Assume a desired minimum cash balance of $10,000. You may assume that interest on any amounts borrowed is already considered in other operating expenses.
To determine the clinic's projected income and expenses for the year 2015, we need to consider the various factors provided. Let's break down the calculations step by step:
1. Number of Patients:
Given that the population of the suburban community is approximately 24,000 and 25% of them are expected to become patients, we can calculate the number of patients:
Number of Patients = Population * Percentage of Patients
Number of Patients = 24,000 * 0.25 = 6,000 patients
2. Average Visits per Patient:
Each patient is expected to have an average of five visits per year. Therefore, we can calculate the total number of visits:
Total Visits = Number of Patients * Average Visits per Patient
Total Visits = 6,000 * 5 = 30,000 visits
3. Physician's Capacity:
Given that one physician can examine 4 patients per hour for 7.5 hours each day, we can calculate the number of patients a physician can examine in a month:
Patients per Physician per Month = Patients per Hour * Hours per Day * Days per Month
Patients per Physician per Month = 4 * 7.5 * 20 = 600 patients
To meet the expected demand of 6,000 patients per year, the clinic will require:
Number of Physicians = Number of Patients / Patients per Physician per Month
Number of Physicians = 6,000 / 600 = 10 physicians
4. Physician's Salary:
Given that the average physician's salary is $11,000 per month, and assuming each physician is salaried, the total monthly cost of physician salaries can be calculated:
Total Physician Salaries = Number of Physicians * Average Physician Salary
Total Physician Salaries = 10 * $11,000 = $110,000 per month
5. Patient Receivables:
The goal is to have patient receivables at the end of the year equal to $220,000. The starting point for improving collections is the current patient receivables.
Starting Patient Receivables = Target Patient Receivables / (1 + Collection Improvement Rate)
Starting Patient Receivables = $220,000 / (1 + Collection Improvement Rate)
To calculate the final patient receivables, we need to consider the total charges for the visits and subtract the collections from charges within the year:
Final Patient Receivables = Starting Patient Receivables + Total Charges - Collections within the Year
6. Operating Costs:
To calculate the flexible budget for operating costs, we need to consider both variable and fixed expenses per visit and per month.
Variable Expenses per Visit:
- Nurses' Salaries: $0 per visit
- Administrative and Technical Salaries: $0 per visit
- Medical Supplies: $6.00 per visit
Fixed Expenses per Month:
- Nurses' Salaries: $18,000 per month
- Administrative and Technical Salaries: $19,000 per month
- Rent: $4,000 per month
- Service Bureau for Medical and Financial Records: $2,000 per month
- Other Operating Expenses: $6,000 per month
Planned Purchases:
Planned purchases of medical supplies are $16,000 per month, paid in the month following purchase.
Service Bureau Expenses:
Service bureau expenses are paid in the month following service.
All Other Expenses:
All other expenses are paid in the month of incurrence.
7. Equipment Purchase:
During the year 2015, the clinic plans to purchase $80,000 worth of equipment, which will depreciate on a straight-line basis over 5 years.
To summarize, we have covered the major calculations involved in projecting income and expenses for the clinic in 2015. These calculations include determining the number of patients, average visits per patient, physician's capacity and salary, patient receivables, operating costs, and equipment purchase.
Remember to incorporate any assumptions or additional information provided.