Have you ever reviewed an overly optimistic financial projection? Physicians and hospitals frequently rely on subject matter experts to develop new service lines or start-up specialty businesses. Here are 6 areas to vet in pro formas for start-ups.
Start-up working capital funds: You cannot develop a start-up hospital, surgery center, imaging center, or physician practice with 30 to 60 days of cash on-hand. Realistically, for most start-ups you need to think about 6 to 12 months of cash, or more. Just divide the projected annual expenses by 12 and compare that amount to the projected starting cash balance the first day the business is expected to open.
Contingency for building change orders: A general contractor once told me their company often bid projects at cost, expecting to make all their profit on the change orders. If this is how some builders are doing business, then you better plan for change orders. Plan for at least 10% contingency on the quoted building costs.
Regulatory requirement timing: Mis-projections for timing of building life safety inspections, state licensure, Medicare certification and/or accreditation will stop you dead in your tracks. What’s worse is that you have to burn through tens of thousands of dollars of rent, payroll, and debt payments while you wait. It is worth 3 to 4 phone calls to local, state, and accreditation agencies to verify wait times. Once you have a successful Medicare or accreditation survey, you can’t drop bills to Medicare until the provider number is physically mailed to you. This could add another 60 days or more to your ability to collect.
Projection ramp-up periods: This should go without saying, but no business is going to fully ramp up within 30 or 60 days. Even ASCs, for which the surgeons have complete control over where their patients’ surgeries are performed, cannot control for the amount of time it takes to get each commercial payor contracted, or unforeseen future changes in their practices.
Payor contracting: Always ask how the projected reimbursement rates were determined. You can’t just pull a magic number out of a hat when projecting reimbursement rates. Projected rates should be based on some sort of empirical research. Medicare, Medicaid, and Tricare rates are known. In addition to state-operated all-payor databases, most major payors are posting their contract rates online now for beneficiaries to compare provider pricing.
Sensitivity, stress tests: Will the business survive if volumes are 15% lower than projected in the most likely case? What if you get building occupancy and then Blue Cross or United sends you a contract for 105% of Medicare rates, instead of 160% of Medicare that was projected? These types of financial scenarios can help you decide whether or not to finish that extra 4,000 square feet now, or build your cash reserves.
Perform your financial modeling like a professional. HCTadvisor licenses the use of our pro forma models. Watch the video demos below and download your new model today.
Have you ever reviewed an overly optimistic financial projection? Physicians and hospitals frequently rely on subject matter experts to develop new service lines or start-up specialty businesses. Here are 6 areas to vet in pro formas for start-ups.
Perform your financial modeling like a professional. HCTadvisor licenses the use of our pro forma models. Watch the video demos below and download your new model today.