Allocating Hospital Resources to Improve Patient

Experience
Case

Author: Lihua Dishman

Online Pub Date: April 04, 2019 | Original Pub. Date: 2019
Subject: Capital Budgeting, Financial Management of Non-profit Organizations, Health Care Management
Level: Complex | Type: Indirect case | Length: 1784 words
Copyright: © Lihua Dishman 2019
Organization: Dominion Medical Center | Organization size: Large
Region: Northern America | State:
Industry: Human health activities
Originally Published in:
Publisher: SAGE Publications: SAGE Business Cases Originals
DOI: http://dx.doi.org/10.4135/9781526496423 | Online ISBN: 9781526496423
SAGE SAGE Business Cases
© Lihua Dishman 2019

© Lihua Dishman 2019

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http://dx.doi.org/10.4135/9781526496423

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Abstract
Dominion Medical Center (DMC) had improved its total profit margin, operating profit margin,
and cash flow margin in the last 2 years because of improved quality of patient care and patient
experience. Yet, to sustain and grow, the nonprofit DMC needed to maintain a safe and invit-
ing campus, its inpatient acute-care hospital needed a renovation to reduce noise levels, and its
children’s hospital needed a kids’ play area to be more competitive. Facing a razor thin oper-
ating margin and limited capital sources, DMC’s board and CEO had to make evidence-based
choices and decisions that would have a positive impact on its employees, patients, and the sur-
rounding communities.

Case

Learning Outcomes
By the end of this case study, students should be able to:

• Explain the importance of quality of patient care and patient experience on hospitals’ total profit mar-
gin, operating profit margin, and cash flow margin.
• Describe operating budgets and cost allocations.
• Perform cost–benefit analyses.
• Apply capital budgeting techniques.
• Perform capital budgeting analyses.

Background
At Dominion Medical Center (DMC), the bright yellow blooms of daffodils in its gardens signaled the arrival
of spring. With a 260-bed Medicare-certified inpatient acute-care hospital, a 95-bed cancer center, and a
175-bed children’s hospital, the non-profit DMC was a major healthcare provider for its surrounding commu-
nities of middle-class suburban residents. Thinking about the board meeting that morning, DMC CEO Joe
Valentine stood by the windows of his office where he could see many pot holes in the parking lots and along
the driveways. Joe’s executive team had developed a proposal to fill the pot holes and repair other damages
in early summer when weather would be warmer and presented the proposal to the board in the morning.

Click here to download Table 1, DMC Parking Lot and Driveway Repair Proposal.

Patient experience scores for the inpatient acute-care hospital ranked in the top quartile in all measures ex-
cept for noise (in patient rooms and ward hallways), which ranked in the third quartile. In 2017, the hospital
received 2% bonus reimbursements from the Centers for Medicare and Medicaid (CMS), which contributed
to an improved operating profit margin and cash flow margin (refer to Table 2). At the board meeting, Joe had
also suggested renovating patient rooms and hallways in phases using noise-reduction insulation materials
in the walls and ceilings, even though the proposed renovation will not result in additional bonus reimburse-
ments from CMS. The children’s hospital also needed attention. Joe proposed adding a kids’ play area.

Click here to download Table 2, DMC Select Financial Data and Ratios.

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History
Despite continued challenges, for 2 years DMC had reported positive total profit margin, operating profit mar-
gin, and cash flow margin. Since joining DMC as its CEO 5 years ago, Joe had made many strides in improv-
ing quality of patient care and patient experience. He had implemented at the inpatient acute-care hospital the
American Heart Association’s Get with the Guidelines® (GWTG), an in-hospital quality improvement program
designed to close the treatment gap in cardiovascular disease, stroke, and resuscitation. This program edu-
cated physicians to adhere to the most current scientific treatment guidelines consistently through training as
a part of physicians’ continuing professional development. Joe did not need to provide additional budget for
the training because the American Heart Association provided online training with materials freely available
and easily accessible. As a result of implementing GWTG, communication between physicians and stroke
patients at the inpatient acute-care hospital improved, and stroke patients’ 30-day readmission rate declined
from around 18% to 11%. This decline increased reimbursements from CMS.

Moreover, he implemented a process that required nurses responsible for discharging post-operation patients
to make follow-up calls with patients 2 days after each discharge. Joe engaged nurses from the front-line to
executives when developing this process and received broad buy-ins when implementing it. Implementing this
process did not result in additional nurse staffing because of their improved work productivity. Thanks to these
follow-up calls, more patients answered that discharge instructions were clear and they would recommend
the hospital when they completed the patient experience survey (refer to the Hospital Consumer Assessment
of Healthcare Providers and Systems [HCAHPS] below). Better experience scores also increased reimburse-
ments from CMS.

For three consecutive years before Joe came on board, DMC had reported a negative operating profit margin
(see Table 2). However, DMC’s total profit margin was slightly above zero and cash flow margin (see Table
2) was positive during this period because of non-operating income from its sizable endowment portfolio and
renting part of its 850-stall parking lots and nearly 5,000 square feet conference facility to local communities
for events.

After meetings with DMC’s board, C-suite executives, midlevel managers, and front-line professionals, Joe
had identified quality of patient care as the root cause of the negative margins. Though DMC’s three facilities
had bed utilization rates much higher than their respective national averages, their 30-day readmission rates
and the hospital’s patient experience scores were below the national averages. Patient experience scores
came from the HCAHPS Patient Survey, which was the first nationally standardized survey instrument. Ad-
ministered to a random sample of adult inpatients after discharge, the HCAHPS survey collected data to mea-
sure patient perceptions of their hospital experience (CMS, 2015). The 10 measures of patient experience
included: nurses communicated well, doctors communicated well, staff explained medicines, given discharge
instructions, help received quickly, pain controlled well, room and bath kept clean, area quiet at night, overall
hospital rating, and would recommend hospital (CMS, 2013).

DMC Governing Board Recommendations

Members of the DMC board reviewed the proposal for fixing pot holes and repairing other damages, approved
it, and recommended that DMC use its operating budget to cover the estimated USD 34,260 cost. Regarding
the suggestion to renovate rooms and hallways with noise-reduction insulation materials, the board could not
reach a consensus because the estimated USD 10,000,000 cost would not result in increased reimburse-
ments or patient charges while the renovation would disrupt the normal patient-care operations. The board
asked Joe to develop a detailed proposal and present it at a future meeting. Some board members suggested
that DMC take a 5-year bank loan to cover the estimated USD 10,000,000.

Finally, board members appraised Joe’s idea to add a kids’ play area in the children’s hospital. The board
believed the addition would enable the children’s hospital to grow more competitive because it would be the
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only one in the region to have such an area. They concurred that the play area might attract new patients,
increase gross patient revenues, and improve the experiences of pediatric patients and their parents during
hospital stays or visits. The board also recommended staffing volunteers in the play areas as supervisors to
prevent harm. After approving using DMC’s endowment fund to finance the initiative with an estimated cost of
USD 90,000, the board asked Joe to present a detailed cash flow analysis, including initial project outlay and
estimated cash inflows for the 5 years after the addition was complete.

DMC CEO’s Considerations

Joe contemplated how to allocate the estimated USD 34,260 for fixing DMC’s parking lots and driveways to
the operating budget of DMC’s three facilities. This project might not result in immediate or explicit economic
benefits but could improve the mood of patients and employees. The project could also prevent injuries to
visitors and vehicles in the parking lots and driveways, thereby reducing legal costs and containing property
insurance premiums. A cost–benefit analysis for this project could be an internal marketing tool to convince
the CFOs of cost allocations.

Joe was disappointed with the board’s hesitation at renovating patient rooms and hallways. He requested a
meeting with the CFOs of DMC and the inpatient hospital to develop a capital budgeting analysis, pointing
out that renovating this hospital’s birthing center could bring in higher patient charges. Birthing services were
very competitive and some of DMC’s competitors had invested in birthing centers to provide a family-centered
environment for new mothers and some low-risk babies who stayed with mothers instead of in the infant nurs-
ery. Furthermore, mothers who were satisfied with the services of the birthing center would likely come to this
hospital for other healthcare needs and to DMC’s children’s hospital for their babies’ healthcare needs. There-
fore, Joe suggested next steps would include: (a) a comparative market analysis between DMC’s inpatient
hospital and its competitors with home-like birthing centers that provide privacy and quieter surroundings; (b)
a capital budgeting analysis; and (c) meetings with the board members who voiced concerns most about ren-
ovating the hospital rooms.

Finally, Joe considered specific estimates of initial cash outflows and subsequent case inflows resulting from
increased patient revenues for the children’s hospital. He asked DMC’s CFO to lead this project and work
with the CFO of the children’s hospital. The CFOs could apply capital budgeting techniques to evaluate the
estimated initial project outlay and estimate cash inflows for the 5 years after the addition of a kids’ play area
in the children’s hospital was complete.

Discussion Questions
1. You must develop a cost–benefit analysis for Dominion Medical Center regarding fixing
pot holes and repairing other damages in its parking lots and driveways. The analytical
report will be presented to the CFOs of the inpatient acute-care hospital, cancer center,
and children’s hospital to allocate costs to their respective operating budgets for the cur-
rent fiscal year. What kind of analytical report would include reasonable estimates, appro-
priate analyses, supported arguments, and clear and appealing presentation? Please re-
fer to the Excel file Case_Table 1, which outlines the DMC parking lot and driveway repair
proposal.
2. Why did DMC’s governing board hesitate to approve the CEO’s suggestion to renovate
the inpatient acute-care hospital’s patient rooms and hallways?
3. What techniques would you use to develop a capital budgeting analysis regarding an in-
vestment in renovating the inpatient acute-care hospital’s patient rooms and hallways?
4. Relative to Question 3, explain your rationale for choosing particular capital budgeting

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techniques. Discuss the development and applications of the capital budgeting tech-
niques as related to hospitals.
5. Evaluate the estimated initial project outlay and estimate cash inflows for the 5 years after
the addition of a kids’ play area in the children’s hospital was complete. The following are
the financial data that you have compiled from the case and estimated with the best avail-
able information:
a. Estimated cash outlay for this project is USD 90,000, financed with
DMC’s endowment fund.
b. The interest rate used to discount cash flows is 6%.
c. Adding a kids’ play area inside the children’s hospital is projected to
result in an annual increase of 1% in Net Patient Revenues on the
basis of DMC’s 2017 Net Patient Revenues (refer to Table 2) for the
next 5 years.

References
Centers for Medicare & Medicaid Services. (2013). HCAHPS Fact Sheet (CAHPS® Hospital Survey) August
2013. Retrieved from https://www.abhmfg.com/content/abh/pdfs/HCAHPS-Fact-Sheet.pdf
Centers for Medicare & Medicaid Services. (2015). System requirements specification: Hospital Compare
downloadable database data dictionary. Retrieved from https://data.medicare.gov/data/hospital-compare
http://dx.doi.org/10.4135/9781526496423

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