Exam 12: Financing and Ownership of Health Care Providers

The value of any capital project can be assessed by estimating expected future cash flows from the project and discounting them to the present value. This procedure accounts for the time value of money.

Below is the list of the most important risks an investor must evaluate when projecting an HMO's profitability. Which option does not belong to this list?

Kaiser Health Plan is the only HMO in the U.S. to consistently maintain its core competencies. That is, it has kept client satisfaction high, while keeping the growth rate of premiums higher than the growth rate of medical costs.

For-profit firms make up the bulk of hospital organizations.

Consumer cooperatives have a long and successful history in development of the HMO.

Multiple studies indicate that non-profit hospitals are usually less efficient than for profits, are slower to respond to changing market situations and most of them provide significantly less charitable care compared to the amount of tax breaks they receive from government for that particular purpose. What does the future hold for non-profit hospitals then? Will they become extinct in the near future, giving way to more efficient for-profit organizations?

It could be argued that the federal and state governments provide an implicit guarantee of hospital borrowings because revenue from Medicare and Medicaid patients is assumed to be guaranteed.

Dr. Yuan opens a lab. The lab has an initial cost of $100,000. Expected net cash flow is $24,000 in the first year, growing by 15% per year. Net cash flow is revenue less expenses. Assume the lab has a 6 year life and there is no scrap value for the lab. -Assume the partnership is formed and net cash flows are expected to grow at 10% each year. All else equal, what are the social welfare implications from the partnership, compared to the scenario of each doctor setting up their own lab?

Consider this method for teaching: The Winners Curse (Thaler 1988). Next time that you find yourself a little short of cash for lunch, try the following experiment in your class. Take a jar and fill it with coins, noting the total value of the coins. Now auction off the jar to your class (offering to pay the winning bidder in bills to control for penny aversion). Chances are very high that the following results will be obtained: (1) the average bid will be significantly less than the value of the coins (bidders are risk averse); (2) the winning bid will exceed the value of the jar. Therefore, you will have money for lunch, and your students will have learned first-hand about the "winner's curse. Explain how you might argue that Aetna's 1996 purchase of the spectacular growth company U.S. Healthcare for $8 billion is an example of The Winner's Curse.