Alternative Working Capital Policy

Elijah Heart Center

The health care industry is the single largest industry in the United State today and represents “over 20 percent of the U.S. Gross Domestic Product” and accounts for approximately $1.5 trillion in revenue (University of Phoenix, 2009, p. 2). With funding cuts, reductions in Medicare reimbursements and payments, and the discounting pressure of managed care, Hospitals are prone to be financially vulnerable (University of Phoenix, 2009). This simulation focused on Elijah Heart Center (EHC), a cardiac care hospital, which is based in New York. EHC’s Finance Department has reported that the hospital’s profit is declining despite the increase in patient volume and revenue. Understanding this issue, the Finance Board has decided to seek help from a financial consultant to help develop and implement a turnaround strategy that will tackle the working capital shortage at EHC, evaluate different funding options for acquiring medical equipment, and help evaluate funding options for capital expansion (University of Phoenix, 2009). Over a two year period, the financial consultant will recommend effective measures to help modernize the hospital, and develop a working capital policy that will help reduce future difficulties for EHC.

Alternate Sources of Short-Term Financing

The first issue that EHC faces is a potential working capital shortfall due to: “huge discounts given to managed care companies, higher wages given to contract nurses, low Medicare reimbursement levels, growth in liabilities, and unused equipment” (University of Phoenix, 2009, p. 6). To improve the cash flow problem EHC will have to reduce agency staff, change the skills mix and choose a loan option, which amounts to $1.5 million, has an interest rate of 9.45% with monthly installments of $131,490 for a 12 month term (University of Phoenix, 2009). This short-term financing loan will help in solving EHC’s current cash flow problem for the next three months because there is no...