A financial planning model for estimating hospital debt capacity.
A computer-based financial planning model was formulated to measure the impact of a major capital improvement project on the fiscal health of Stanford University Hospital. The model had to be responsive to many variables and easy to use, so as to allow for the testing of numerous alternatives. Special efforts were made to identify the key variables that needed to be presented in the model and to include all known links between capital investment, debt, and hospital operating expenses. Growth in the number of patient days of care was singled out as a major source of uncertainty that would have profound effects on the hospital's finances. Therefore this variable was subjected to special scrutiny in terms of efforts to gauge expected demographic trends and market forces. In addition, alternative base runs of the model were made under three distinct patient-demand assumptions. Use of the model enabled planners at the Stanford University Hospital (a) to determine that a proposed modernization plan was financially feasible under a reasonable (that is, not unduly optimistic) set of assumptions and (b) to examine the major sources of risk. Other than patient demand, these sources were found to be gross revenues per patient, operating costs, and future limitations on government reimbursement programs. When the likely financial consequences of these risks were estimated, both separately and in combination, it was determined that even if two or more assumptions took a somewhat more negative turn than was expected, the hospital would be able to offset adverse consequences by a relatively minor reduction in operating costs.