HCM 700 Module 7 Financial Analysis Paper Example

Can Willow Creek Afford to Keep Its Staff? A Three-Year Financial Analysis

[Student Name]

Southern New Hampshire University

HCM 700: Healthcare Administration Capstone

Module Seven Paper

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

Can Willow Creek Afford to Keep Its Staff? A Three-Year Financial Analysis

The parent organization's finance committee will approve the Stay and Grow plan only if it believes the numbers. This paper builds those numbers transparently. It describes Willow Creek Care Center's baseline economics, itemizes the plan's costs, estimates savings and new revenue under stated assumptions, combines them in a three-year pro forma, calculates net present value and payback and tests how results change if the plan underperforms.

Baseline Economics

Willow Creek earned $14.6 million last year and spent about $15.05 million, an operating loss of $450,000, or minus 3.1%. Its average daily census of 97 produced about 35,400 resident days. Medicaid paid for 64% of those days at an average of $248, below the estimated fully loaded cost of $286 per day. Medicare, at roughly $720 per day under its patient-driven payment model, and Medicare Advantage, at about $560, earn positive margins on short-stay residents, while private pay covers roughly its cost. The facility therefore depends on short-stay volume to offset Medicaid losses, and staffing shortages that force it to decline hospital referrals hit its most profitable line.

Plan Costs

Stay and Grow's largest cost is the wage scale, about $360,000 a year once positions fill. Differentials for mentors, float pool aides and weekends add about $107,000. The career ladder's tuition assistance and step raises cost about $75,000, charge nurse coaching $15,000 and the scheduling app $12,000. Phase two, beginning in year two, adds about $45,000 a year for training and a nurse practitioner facilitator. Two ceiling lifts are a one-time capital cost of $60,000. Year one operating costs are about $520,000, rising to about $590,000 in years two and three.

Table 1. Plan Costs (thousands of dollars)

Note. Estimates by the author with human resources and finance; year 1 wage cost lower because vacancies fill gradually; year 2-3 'other' reflects a small offset from reduced orientation materials.

Savings From Reducing Agency Use

Agency staff cost Willow Creek $1.9 million last year, about 18% of nursing hours. Replacing an agency hour with an employed hour saves roughly 47% of its cost, because agency rates are about double the loaded cost of employed staff. The plan targets agency at 13% of hours in year one and 5% in years two and three. Agency spending would fall to about $1.37 million, then $0.53 million, saving about $250,000 in year one and $640,000 in each later year after paying the employed staff who replace agency hours. Heavy agency reliance was tied to weaker quality scores by Castle (2009), so these savings should arrive alongside better care.

Savings From Lower Turnover

Each aide departure costs about $5,200, but roughly $2,100 of that is agency coverage during the vacancy, already counted in agency savings. To avoid double counting, only the remaining $3,100 for recruiting, orientation and precepting is used here. If aide departures fall from 58 to about 38 in year one, 33 in year two and 28 in year three, turnover savings are about $62,000, $78,000 and $93,000. Gandhi et al. (2021) found high turnover common and associated with lower ratings, so these figures understate the full value of stability.

Recovered Occupancy

Staffing shortages forced Willow Creek to decline 38 referrals last year. As staffing stabilizes, the plan assumes occupancy rises from 81% to 83% in year one, 86% in year two and 89% in year three. New days are assumed to split evenly between short-stay Medicare and Medicare Advantage residents and long-stay Medicaid residents, averaging about $424 in revenue per day. Because each added day also adds costs for food, supplies and some staffing, the analysis uses contribution margin, about $175 per day, rather than revenue. Added contribution is about $153,000, $383,000 and $613,000.

Quality Payments

Medicare's skilled nursing facility value-based purchasing program withholds a share of Medicare payments and returns part of it based on performance, including readmissions. Mor et al. (2010) documented how costly rehospitalization from these facilities is for Medicare. If phase two lowers Willow Creek's rehospitalization rate from 25.8% toward the state average, the facility could recover roughly $40,000 a year in year three. The estimate is included but kept small because it depends on how peers perform.

Three-Year Pro Forma

Combining costs and benefits, the plan has a net effect of about minus $55,000 in year one, plus $511,000 in year two and plus $796,000 in year three, before capital. Applied to the baseline loss, Willow Creek's operating result moves from minus $450,000 to about minus $505,000 in year one, plus $61,000 in year two and plus $346,000 in year three. With revenue growing from added census, the margin moves from minus 3.1% to about minus 3.4%, plus 0.4% and plus 2.1%.

Table 2. Three-Year Pro Forma Summary (thousands of dollars)

Note. Assumes Medicaid rates and costs both rise about 3% a year and offset; figures rounded.

Net Present Value and Payback

Including the $60,000 capital cost in year one, the plan's net cash effects are about minus $115,000, plus $511,000 and plus $796,000. Discounting those flows at 6%, the parent organization's cost of capital, yields a present value of roughly $1.01 million across the three years. The plan pays back its year one shortfall early in year two. Benefits would likely continue beyond year three, so a three-year window is conservative.

Sensitivity Analysis

Two assumptions carry most of the risk: occupancy gains and agency reduction. If occupancy rises only half as much as planned, the net effect falls to about $320,000 in year two and $490,000 in year three. If agency use falls only to 10% rather than 5%, the net effect falls by about $250,000 a year. If both disappointments happen together, the plan roughly breaks even in year two and gains about $240,000 in year three. The plan is financially robust to either shortfall alone and still modestly positive when both occur.

Table 3. Sensitivity of Net Plan Effect (thousands of dollars)

Note. Calculated by the author from Table 2 assumptions.

Funding the First Year

Year one requires about $115,000 more cash than the facility generates, plus a working capital cushion while wage increases start before savings arrive. The analysis recommends that the parent organization commit $250,000 from its board-designated reserve, to be repaid from year two and three results. A six-month checkpoint will compare actual agency hours, turnover and census with plan; if agency hours have not fallen by at least a quarter, the steering committee will revise the plan before further commitments.

What the Numbers Do Not Capture

The pro forma omits benefits that are real but hard to price: fewer inspection deficiencies and possible penalties, better family satisfaction and word of mouth, fewer staff injuries and the moral value of residents knowing who will care for them each morning. It also omits risks, such as a regional wage spike that forces a larger raise. The committee should weigh these alongside the figures.

Conclusion

Stay and Grow costs about $520,000 to $590,000 a year but, under stated and conservative assumptions, returns more through lower agency spending, lower turnover costs and recovered census, producing a three-year net present value near $1 million and a positive margin by year two. The case rests mainly on occupancy and agency reduction, both of which the plan can monitor closely. Milestone Three will design that monitoring and the risk plan.

References

Castle, N. G. (2009). Use of agency staff in nursing homes. Research in Gerontological Nursing, 2(3), 192-201. https://doi.org/10.3928/19404921-20090428-01

Gandhi, A., Yu, H., & Grabowski, D. C. (2021). High nursing staff turnover in nursing homes offers important quality information. Health Affairs, 40(3), 384-391. https://doi.org/10.1377/hlthaff.2020.00957

Mor, V., Intrator, O., Feng, Z., & Grabowski, D. C. (2010). The revolving door of rehospitalization from skilled nursing facilities. Health Affairs, 29(1), 57-64. https://doi.org/10.1377/hlthaff.2009.0629