Anthony Volpe

10/26/15

FINC 4300w

University of Virginia Case

Larry Fitzgerald, who is the vice president for business development and finance,

proposed a new long-term acute care (LTAC) hospital to the board of director of the University

of Virginia Health System. The University of Virginia’s Health System is a non-profit

organization. This long-term acute care hospital is designed to service patients who required

hospital stays of 25 days or more and at least some acute care during that time. Since 1999, The

University of Virginia’s Health system maintained a profit margin of 4.9%, while the board of

director considered 3% as a minimum to sustain the system. However, in developing a new

project, the board wanted 5% profit margin as a minimum for the investing consideration. The

board also wanted to reinvest any profit that is beyond the 5% level in developing teaching and

research purposes. Fitzgerald thought that he could bring more money to the University of

Virginia’s Health System, and he thought the long term acute care could do that, while giving

patients longer care if they needed.

Long-term acute care had some advantages, these are what Fitzgerald saw. “LTAC

hospitals were financially attractive to medical centers, because having one increased the amount

of money available for patient care. Insurance companies reimbursed hospitals set amounts of

money for each patient in its facility based on the patient’s diagnosis, regardless of the time

involved the patient’s treatment and hospital stay. Yet if the patient was transferred to a LTAC

facility, the hospital could bill insurance for the patient’s stay in the hospital as well as for time

spent in the LTAC. The LTAC facility also reduced patient care costs as the average daily

hospital stay per patient cost more than $3,000 compared to only $1,500 per day for an LTAC.”

The board wanted to maintain the AA bond rating for the hospital to keep the borrowing cost low

and allow the hospital to effectively compete for debt dollars in the future. The total investment

for the LTAC project was $15 million, which Fitzgerald believed that the loan would not

jeopardize the AA rating. The Fitzgerald’s proposal to the board would be more convincing and

effective if a detail performance and profit forecast was presented.

It can be beneficial to the University because the more patients can bring more

experience in the deal with the cases. More supervising doctors and nurses can be brought in to

gain experience and the LTAC will benefit people in the area who may need longer hospital care

than other hospitals can provide. This expanded hospital could be beneficial to all who work

inside, more rooms for all patients, private rooms for the aforementioned patients, and better

living and working conditions for all parties involved.

I feel that a for-profit LTAC facility would approach a little differently. There is no tax

exemption for a for-profit organization, and they have to pay taxes. They would have to raise

capital for shareholders, so they may not be so thrilled to take on this deal. If the University of

Virginia was a for-profit as it had once been, they would probably need more money by selling

off shares in the company and raising the capital. Fitzgerald would either need a larger share and

input more money, or need more investors. “Unlike the for-profit hospitals that ultimately had to

earn a return for shareholders, nonprofits such as the University of Virginia. Health System had

to strike a balance across its various objectives. A typical for-profit hospital required a pretax

profit margin of 15% to justify a capital investment, whereas a nonprofit could require a lower

margin and still meet its objective of providing excellent clinical care”.

All of these firms had low average costs of capital, being that the University of Virginia

is trying to get an idea of the set, they should most likely use those cash flows to try to emulate

the other for-profit companies as long as they can maintain their success. I feel that Fitzgerald

should not use the number to discount. Each for-profit long term acute care facility is different,

and they have to adjust for their own costs to operate among other things. NPV and IRR are

driven by cash flows and the discount rate. If a facility has low or no cash flows, it cannot have a

great NPV and IRR.

I feel as though the LTAC should be proposed. Based on the financial numbers, they do

have enough cash flows to maintain a long term acute care facility so long as the cash flows

increase as the facility operates. Fitzgerald may have to put a lot of time and even more money to

keep it operating, but relying on the past success of LTAC in for profit organizations, they may

have a harder time operating in a not-for-profit organization. It is a risky gamble, but I feel that if

they can pull it off, they should have much success as a long term acute care facility that is not

for profit.