The primary subject matter of this case is a capital budgeting decision. Capital budgeting issues are appropriately discussed in accounting and/or finance disciplines, as well as healthcare management courses. The case and teaching note support the discussion and analysis of several secondary issues, in addition to the quantitative and qualitative factors incorporated in capital budgeting decisions. These issues include, but are not limited to, ethical issues, government policy practices, and sensitivity analysis. The quantitative analysis requires the student to demonstrate an understanding of the complexity that may be involved in determining relevant factors included in a capital budgeting decision, as contrasted with the simplicity of most textbook capital budgeting problems. The case is appropriate for use in junior level classes (level three) and above. There is a great deal of flexibility incorporated in the case, dependent on the instructor's desire to pursue, or not pursue, discussion of the secondary issues. This flexibility makes the case suitable for advanced analysis and discussions at higher course levels, up to and including first year graduate levels (level five). The number of class hours required to teach the case is dependent on the depth explored by the individual professor. However, class hours would be expected to range from one to two hours; preferably over two class meetings. Preparation hours required of the student are expected to average two to four hours.
This case considers the dilemma being confronted by an orthopedic physicians group. The practice is facing shrinking revenues driven by government plans to reduce Medicare reimbursements. In an effort to avoid salary cuts to physicians that appear imminent, members of the practice suggest raising rates to private payers. When this alternative is ruled out, it is decided that an expansion of ancillary services may provide a solution to the dilemma. The primary decision is whether to expand services by in-sourcing the Magnetic Resonance Imaging (MRI) diagnostic tool. Quantitative analysis of this decision requires the student to identify and determine the projected cash flows, associated with acquiring the MRI, overa twelve year period using net present value analysis. The realism of this decision problem is enhanced due to the fact that the physician's group serves several different classes of customers as well as using the MRI as a diagnostic tool for a variety of ailments/injuries. Each patient group and procedure results in a different reimbursement amount. This analysis is then expanded with two potential alternatives; a ten percent increase in prescribed MRIs or elimination of service to Medicare/Medicaid patients. Students should identify the quantitative impact of acquiring the MRI versus the status quo, as well as the ethical considerations associated with eliminating services to Medicare/Medicaid patients. This addition invites the discussion of business ethics from a stakeholder perspective.
BODY OF THE CASE
The following exchange recently took place at Physicians Orthopedic Group, Inc. (POGI) in response to recently proposed Medicare reimbursements. Dr. Adams and Dr. Baker are the original founders of the practice group and are currently serving the group as president and treasurer. Carolyn Conway is the office manager.
Ms. Conway: Medicare just announced cuts in the reimbursements for all covered healthcare services by five percent. If we don't find a way to make up this loss in revenues we are going to have to find a way to cut costs, including, reducing physician and staff salaries.
(visibly concerned): Can't we just charge our private insurance patients more for their services to make-up for the Medicare cuts?
Ms. Conway: No. Insurance companies rarely pay us the amount that we bill them and their reimbursement rates are also fixed by contract. …